Ecs 3200 final
Employment Rate calculation
(# employed/ labor force) x 100
Unemployment rate=
(# of unemployed/ Labor force)
Neo-Malthusian Trap
->low income per capita->low saving-foreign aid-> high investment->high growth rate of output->high population growth->etc.
Horse economies
-Middle income -High output growth rate -Lean and fast -China, Thailand, Indonesia, Malaysia, Vietnam
When did Korea become a member of OECD?
1996
Flying Geese Hypothesis
3 patterns: 1. Product life-cycle (M->P->X) 2. Inter-industry sequencing 3. Inter-regional catching up
What is the new community movement? What are the impact of the new community movement?
A way for the bankrupt economy could improve Korea's living standards. Received free cement, and villages who showed promise received further funding. The gave the people confidence that anything was possible, which gave them hope for the future It increased social awareness in cities, factories, and work places
China's "one-child policy"
After famine in 1960, population boom caused government to impose birth control policy in 1980. Side effects: Surplus of men (20/30 million), increase aging population with fewer productive working population (children as parents' caretakers), increase in dependency ratio
In the Solow model, how does the saving rate affect the steady-state level of output per capita?
An increase in saving rate will move the economy from the initial steady-state level of output to the higher steady-state level. During the transition, we will see output per worker grow.
If the government wants to fix the currency value to its initial level, which currency they will have to buy or sell? currency depreciation
Buying domestic currency Selling foreign currency
Capital accumulation eqn
Change in capital stock = investment - depreciation
Lim's S curve classifies the Asian economies into 3 groups by comparing countries'
GDP per capita and Growth rate of GDP per capita
Did IMF bailout the Asian economies? Why controversies?
IMF gave 36 billion for Indonesia, 58 Billion for Korea, 17 Million for Thailand. Controversial because there were conditions attached to the bailout like reduce account deficits, raise taxes and interest rates, foreclosure unviable banks and allow foreign takeover. And Malaysia declined the IMF's help. Experts say it made no sense to tighten fiscal and monetary policies, and this contraction sent the economy into deeper recession
Flying Geese Hypothesis: Product life cycle
Import : import substitution : export
Flying Geese Hypothesis: Inter-regional catching up
Japan : 4 tigers : ASEAN 3 : China : Vietnam
Who are the ASEAN 3
Malaysia, Thailand, and Indonesia
Horse economy
Middle income, high output growth rate, lean and fast (Thailand, Indonesia, Malaysia, Vietnam)
GDP (using GDP deflator)
Nominal GDP/Real GDP) x 100
What is industry targeting?
Optimal experimentation strategy of government to figure out industries their country has comparative advantage in ("Picking the winner")
Lorenz Curve
Plots the cumulative share of income vs. percent of households considered in cumulative share -Graphical representation of wealth distribution -Difference between 45 degree line and Lorenz curve is a measure of inequality More distance-more inequality
According to Radelet, Sachs, and Lee (1997) empirical research paper, what are the factors that positively affect the economic growth? What are the factors that negatively related to economic growth?
Positive: Openness and manufactured exports Higher saving and investment Strong macroeconomic management Negative: Longer life expectancy Low education levels Natural resource abundance
Why float? Why not?
Pros o Currency crisis avoidance (automatic and continuous adjustment to equilibrium) o Policy independence ( allow country to determine monetary policy independently) Cons o Excessive exchange rate volatility (harder for trade and investment)
List and briefly explain four reasons that make a country more likely to peg its exchange rates
Small country, the country should be a price taker in the world markets Open economy, the country should trade a lot Concentrated trade with one or few countries, the more trade goes to one country the more likely that country will be the country you should be with Harmonious inflation rates, a country cannot have very different inflation rates from the country you peg, otherwise the peg will not work.
Who tend to peg?
Small economies Open Economies (lots of trade) Highly concentrated trade (peg with a country you trade a lot) Harmonious inflation rates (similar monetary policy to country they peg with) Ex. Bahamas should peg with US because small, lot of trade (tourism)
What is the sudden stop? How does it relate to Asian Crisis?
Sudden or large drop in capital inflow Foreign direct investors stopped flooding these countries with capital and took it instead
If a U.S. citizen buys a television made in Korea by a Korean firm
U.S. net exports decrease but U.S. GDP is unaffected.
PPP adjustment is for
different prices of the same bundle of goods and service across countries
(Hypothesis) Population growth
negative link
Change in capital per worker
sy - d + n)k
The CPI index is designed to measure:
the cost of a typical bundle of consumer goods has changed over time
International data suggest that economies of countries with different steady states will converge to:
their own steady states
What is the rule of 70
"A variable that grows at a constant rate of 'X'% will double in approximately 70/X periods -Ex-Population grows at rate of 14% -- when will it double? 70/14 = 5 years
What is the IMF? What does it do?
"International Monetary Fund"- cooperative institute Promotes international financial stability and monetary cooperation Advisory members of economic policy Give financial assistance for troubled economy from financial crisis Issue SDR
Rule of 70
"x% per period" will double in value in approximately "70/x periods"
What is considered absolute poverty
$1.25 a day
Unemployment rate
(# unemployed/labor force) X 100 -Labor force = unemployed + employed -Labor force participation rate = (labor force/adult population)X100
Gini Coefficient
(Area A)/(AreaA+AreaB) 1=perfect inequality 0=perfect equality 0.5= means inequality is severe and needs to be brought down
According to Lim's (1996), what is "the low-level equilibrium trap"? How would a turtle economy break away from this trap?
(Circular continuous cycle) o low economic growth o low income o low saving o low investment · A turtle economy would have to increase domestic saving (giving up current consumption to increase investment)
What is "Neo-Malthusian Trap"?
(Circular continuous cycle) o low income per capita o low saving o high investment o high growth rate of output o high pop. Growth rate
Assimilationist beliefs
(Romer, Pack, Pack and Page) -HPAEs adopted/adapted to foreign technology->experienced high TFP->economic growth -lacks mathematical formalization (less believable)
Fundamentalist beliefs
(Young, Krugman, K&L) -Growth in region input driven -Input-driven growth: capital accumulation (more investment) and more saving -No miracle, growth not sustainable (law of diminishing returns) -K&L: found technological progress (TFP) not high in East Asia
How HPAEs increased investment
- Create infrastructure that complement to private investment - Create investment-friendly environment *Tax breaks *Subsidize low-interest loans *Control capital input price low *Repress interest rates on loans to increase demand for credit
Why macroeconomic management
- East Asia kept budget deficit under control - Moderate/stable inflation rate (10% and lower) - Sustained political stability (not many changes in head of state) - State-influenced growth with market allocation
How HPAEs increased saving
- High interest rates on deposits - Lower transaction costs to access banks for rural savers - Limit banking competition - Impose high taxes on luxuries (increase savings) - Impose mandatory pension saving - Govt run budget surplus
How do Asian governments try to alleviate rural development problems?
- Invest in rural infrastructures -Invest in heath and education -Land Reform -Microfinance -Research and provide modern inputs -Price Stabilization
Natural resource abundance
-(primary product exports/exports) -How much country relies on commodities that have been cut, dug up, harvested compared to economic activity -natural resource curse: countries w/ abundant natural resources tend to perform poorly in economic growth
From growth accounting, what factors play an important role in HPAEs economic growth?
-Components that can cause growth: capital, labor, and technology advancement -Growth in labor (rising female labor force participation rates and falling birth rates) -Growth in capital inputs (physical investment) - saving and investment ratios have risen in HPAEs -Contribution of technology progress to output growth in HPAEs is small relative to contribution of increase in capital and labor
Elephant economies
-High income -Low output growth rate -Large and slow -Japan, US
X variables
-Human capital -National resource abundance -Geographic variables -Policy variables -Demographic variables
Solow growth model, how does rate of population growth affect the steady state level of output per capita
-Increase in population growth rate lowers the steady state level capital per worker and output per capita -Leads to lower income per worker, but total aggregate income increases when you increase population
Why did HPAEs succeed in high human capital formation?
-Increased education expenditures by subsidizing direct cost of education - Allocated budget to basic, not higher, education (more children in primary school->more demand for higher education->paid by private sector)
What determines k?
-Investment -Depreciation
What part about HPAEs economic growth did Paul Krugman disagree with the World Bank Report on?
-Krugman said there was no miracle behind East Asia's economic growth, but simply capital accumulation (input-driven) -Input-driven growth is not sustainable because of law of diminishing returns -Krugman said technological progress (gTFP) was low in HPAEs --> so growth will slow down
Geographic variables
-Landlockedness: (distance of coastline/land area). May increase transaction costs of trade->affect economic growth. Border conflicts with neighboring countries->instability -Location in tropics: economists believe growth slower due to spread of disease, more resource allocation to disease prevention
Turtle economies
-Low income -Low output growth rate -Small, poor, stagnant -Ex. NK
MPK
-Marginal product of capital per worker -Tells us how much additional output can be produced when increase capital by one unit -MPK=f(k+1)-f(k) -MPK= change in y/change in k -As k (capital per worker) increase, MPK decreases
What is infant industry argument?
-One of the oldest argument for adopting trade protection Production cost of newly established domestic industries in a country may be initially higher than those of well-established foreign competitors. Overtime, new domestic producers can experience cost reductions (learning by doing, economies of scale) and can end up attaining the production efficiency as foreign competitors. However, due to the initial absence of experience, if domestic industry is not protected from foreign competition, it will never take off. Temporary protection of domestic industry can be in the national best interest. The infant industry argument assumes that it is known with certainty that industry in question will be profitable eventually. However, no one knows for sure whether or not a particular infant industry will in fact be profitable in the future. Financial market would require high compensation for the risks of failing and high interest rate will make this industry unprofitable.
How did the Asian govt promote exports?
-Welcomed technology transfers -OPen to foreign direct investment (FDI) -Subsidize manufactured exports (ex- "tax holidays") -Devalued currencies to support exporting sectors
Low level equilibrium trap
-applies to turtle economies -cycle: low income->low saving->low investment->low economic growth->etc.
IF HPAE's growth attributed to capital accumulation
-convergence -same steady-state level -law of diminishing returns takes effect - growth slows down
Findings for convergence
-hypothesis supported -negative relationship between gy and y0
How to get out of low-level equilibrium trap
-increase domestic saving -investment raised by foreign aid (in saving's absence)
Factor accumulation
-increase in capital stock (machines, roads, computers) (K) - increase in labor force (L)
Why no TFP in East Asia?
-invests little in intangible capital (R&D) -mature, sophisticated technology->limits innovation -adding problem in growth accounting
Characteristics of Horse economies
-middle income level -high output growth rate -Lean and fast -China, Thailand, Indonesia, Malaysia, Vietnam
Horse Economy
-middle income level -high output growth rate -high savings rate -lean and fast
IF HPAE's growth attributed to ^TFP
-no convergence -reach its own steady-state -growth will continue at high rate -Economic power shifts to East Asia?
What are the differences between Chaebol(Samsung, LG, Daewoo, Hyundai) and Keiretsu (Toyota, Mitsubishi)?
1)Chaebol is family dominated and stays in control. While in Japan the Keiretsu was controlled by professional corporate management 2)Chaebols were prevented from buying control shares of banks and government regulations made it difficult to develop banking relationships. While Keiretsu worked with affiliated bank and had nearly unlimited credit 3)Chaebol formed subsidiaries to produce components for exports, while large Japanese corporations employed outside contractors.
What were the factors that positively affected economic growth according to Radelet, Sachs, and Lee
1. Education 2. Open to international trade 3. Govt saving 4. Quality of government institution 5. Growth of working age population 6. Life expenctancy
What were the factors that negatively affected economic growth according to Radelet, Sachs, and Lee
1. Natural resource abundant 2. Landlocked 3. Tropics 4. Population growth
3 key elements that explain rapid growth in East Asia (R,S,L)
1. Openness and manufactured exports 2. High saving and investing 3. Strong macroeconomic management
Policy variables
1. Openness to trade 2. Government saving: tax revs-govt spending 3. Quality of public institutions (transparency best)
Demographic variables
1. Population growth 2. Working age population growth 3. Life expectancy (longer expectancy->implies more saving)
What are three patterns of the Flying Geese Formation
1. Product-life cycle 2. Inter-industry sequencing 3. Inter-regional catching up
8 Common characteristics of HPAEs
1. Rapid and sustained economic growth 2. Declining income inequality and reduced poverty 3. Declining in agriculture's share, but rising agriculture productivity 4. Rapid growth of exports 5. Rapid demographic transitions 6. High investment and saving rates 7. Rapid human capital formation 8. Rapid productivity growth
What all leads to international financial crises?
1. Waves of overlending and overborrowing 2. Exogenuous international shocks 3. Exchange rate risk and large international short-term lending
Impacts of FG theory
1. generate positive sentiment to FDI 2. Pro-trade orientation 3. Regional cooperation *APEC: Asian-Pacific Economic Cooperation *AFTA: Asia Free Trade Area
How do manufactured exports support economic growth?
1. growth allows countries to use comparative advantage in labor-intensive operations 2. Fosters technological progress (TFP) 3. Foreign earnings pay for imported capital good (improve production) 4. Success has spillover success in other sectors
During which of the above years was the purchasing power of the president's salary
1940
Why do East Asian governments use industrial policies(tax policies, export processing zones, import substitution)? What would be justifications for such interventions?
A country would use Industrial policy to specialize production toward sectors that have better prospects for economic growth and use their comparative advantage (rather than rely on market mechanism) Justifications: this helps jumpstart the process of industrialization • Infant industry argument, inter-industry spillover, industrial targeting, coordination failures, information externalities, inward foreign direct investment(FDI)
How do we compute a country's openness? What does it imply?
A country's openness is computed by comparing the share of import volumes and export volumes to the size of the economy. It implies that in an open economy there are less trade restrictions and more freedom to trade. Moreover, high openness indicates that the country tends to rely more on international trade.
What is an economy's production function? What factors determine the output in the economy?
A production function relates physical output of a production process to physical inputs or factors or production. o Y = F(K,L) We begin with a production function, where output Y is a function of inputs K (physical Capital, such as buildings, computers, etc.) and L (labor units).
What is the global poverty line? Why poverty matters? What does being poor mean?
A state or condition in which a person or community lacks the financial resources and essentials to enjoy a minimum standard of life and well-being that's considered acceptable in society. Currently at $1.25/day
What is the condition for the steady-state equilibrium?
A steady state economy seeks to find an equilibrium between production growth and population growth. The economy aims for the efficient use of natural resources, but also seeks fair distribution of the wealth generated from the development of those resources
What is trade surplus? What is trade deficit?
A trade surplus is when exports are greater than imports. Trade deficit is when imports are greater than exports.
Law of diminishing returns to capital
Additional capital added to the economy has less and less effect in increasing output (1st airport adds more to nation's production compared to the 201st)
In a steady state with no population growth and no technological progress
All of the above
According to Radelet, Sachs, and Lee (1997), how would manufactured exports promote economic growth in East Asia?
Allows countries to use their comparative advantage in labor-intensive operations · A manufactured export fosters technological progress · Foreign earning from manufacturers exports pay for imported capital goods. · Success in exporting has spillover effects on the other sectors
What do the diminishing returns to capital mean? How to show that on the production function graph?
An extra investment in capital does not payoff as much as it did before. This implies that the wealthier a country is, the less effect an increase in k will have. Therefore we should not be surprised to see Japan's growth slowing and Vietnam's growth is still relatively high. So when investment is doubled, we might expect that output might less than double. At the beginning of production: an increase in capital per worker will increase the output per worker at an increasing rate. Towards the end of production function, an increase in the capital per worker will increase the output per worker at a decreasing rate
Total factor productivity =
Annual growth rate of labor force
What is Special Drawing Right (SDR)?
Artificial "basket" currency used by IMF for internal accounting purposes Used to solve liquidity problem to substitute gold Fixed with Dollar, Euro, Yen, Pound Used by some countries as peg for own currency, settle international accounts and lending, used as an international reserve asset
Explain changes in the rate of natural increase as a country goes through demographic transition.
As a country goes through a demographic transition, first will have a decline in death rate and then a decline in birth rate. This will lead to a decrease in the rate of natural increase.
How does maturity mismatch apply to the Asian Crisis?
Asian Countries borrowed short term loans from the US and lend to domestic firms for a long term maturity
Contest Based Competition
Asian Style (Japan SK) Number of competing firms are small Evenly matched firms are preferable More like sport competition govt act as referee
What does ASEAN stand for
Association of Southeast Asian Nations
ASEAN
Association of Southeast Asian Nations 1. Malaysia 2. Thailand 3. Indonesia
From the video, which of the following industries becomes a successful industry in South Korea
Automobile
Why does the birth rate decline much slower than the death rate as a country develops?
Because as a country develops, a country is able to improve the life expectancy of their people
Inflation Rate
CPI year 2 - CPI year 1)/CPI year 1)) x 100
Highest contribution to output growth in HPAEs?
Capital and labor (not tech)
In the Solow model, what will happen to the change in capital stock, if new investment exceeds the depreciation of existing capital?
Capital stock will expand, and will continue to expand until depreciation catches up to new investment. → Move toward k* at point A. → During this process, the economy will have more capital per worker. "Capital Deepening" At k2 : the economy starts out with a capital level that is too high. Depreciation > New Investment ∆k = i - d * k → ∆k < 0 → capital stock will fall until it reaches k*. Once the economy arrives at the steady-state level, there is no more growth.
an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.
Cartel
How does export subsidy work? Cash vs. cost subsidy
Cash Subsidy: The government might pay cash to the producer for each exported item. Cost Subsidy: The producer might benefit from a tax break, or low interest loans. Furthermore, the government might subsidize the research & development or labor cost. Either one of these would be considered cost subsidies.
What is chaebol?
Chaebol (Korea) is large business conglomerates, typically owned by a single family with authoritarian management. Many affiliated firms cluster around one parent company. Chaebol needs to create strong relationship with government in order to access preferential low-interest credit.
Capital accumulation model
Change in capital stock = investment - depreciation
What is the capital accumulation equation?
Change in the capital stock = investment - depreciation ∆𝑘 = 𝑖 − 𝑑𝑘
"The east asian miracle" identifies 8 HPAES which is NOT one of them
China
Examples of population control policies East Asian countries
China: One child policy o One and a half child policy? Indonesia: emphasized fertility control o Govt. distr. Contraceptives through health clinics Singapore: Stop-at-two policy o Reduce paid maternity leave
How does the export cartel work?
Collusive pricing strategy between exporters to set quantity below perfect-competitive equilibrium level to raise price
Rising rate of human capital accumulation
Common characteristic of HPAEs. Increase in quantity of schooled population , quality of education, training-->improved labor force
Rapid productivity growth
Common characteristic of HPAEs. Total factor productivity necessary for long-term growth of economy
What is natural resource curse? How do we explain the phenomenon?
Countries with an abundance of non-renewable resources experience stagnant growth or even economic contraction. The resource curse occurs as a country begins to focus all of its energies on a single industry, such as mining, and neglects other major sectors. o A nation finds ample natural resource reserves o Economic focus begins to target this high-income industry o Skilled workers from other sectors transfer to the resource sector o Higher wages make the national currency less competitive o Other industries, especially the manufacturing sector, begin to suffer
What is the strong form of pegged currency? (not the strongest though)
Currency board- fixed rate with 100% foreign reserves in central bank ♣ Monetary regime based on explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate Ex. Lithuania, Estonia, Hong Kong, Argentina
How does the rate of population growth affect the steady-state growth rate of output per capita
Decrease
How does the rate of population growth affect the steady-state level of output per capita
Decrease
import tariff work What will happen to the quantity imported?
Decrease
How does export subsidy work? What will happen to the domestic consumption?
Decrease b/c of price increase
In the Solow model, how does the rate of population growth affect the steadystate level of output per capita?
Decrease in the level of output per capita
An increase in the rate of population growth (n) will:
Decrease the steady state level of capital per worker
An increase in the rate of population growth will
Decrease the steady state level of capital per worker
What are weak fundamental factors that caused the asian crisis?
Dependence on massive capital inflow Chronic current account deficits Fixed exchange rate system weak financial sector
What is the economic growth?
Depends on: 1. Factor Accumulation - Increase in capital stock (k) 2. Productivity growth - An increase in the amount of output produced by a given # of machines or workers.
Exchange rate: depreciation vs. appreciation
Depreciation(weaken): a decrease in the value of a currency as measured by the amount of foreign currency it can buy Appreciation(strengthen): a increase in the value of a currency as measured by the amount of foreign currency it can buy
What were the three LOWs that helped Korea's economy to flourish?
Devaluation of the Dollar Low Oil prices Low interest rate
Robert Solow
Developed Solow Growth Model (1956) to quantify contribution of each factor to economic growth to a country
Who are the discouraged workers? How do they affect the true level of unemployment?
Discouraged workers are people who have been out of work for a long time and giving up in looking for a job. Since they are not looking for a job, they are counted as "not in the labor force". Discouraged workers are ready for employment but are convinced there are not any opportunities for them but if one came up they would take it. They affect the true level of unemployment because they make the rate understated because they are actually unemployed
What is the strongest form of the pegged system?
Dollarization - adopt someone else's currency Currency of another country circulates as sole legal tender, or they belong to monetary or currency union. ex. Ecuador, El Salvador, Panama, and the EU
After Korean War, what was the nation's highest priority during the restoration? What had happen afterward?
During restoration the top priority of Korea was education which ensured highly trained workforce
Why high-saving rate?
East Asia's young-age dependency ratio (children to support) lower than other developing countries due to decline in birth rate and long-life expectancy increases savings in time
How the Asian-style capitalism differs from the Western-style capitalism?
East Asian governments explicitly or implicitly involve in investment, production, and planning decisions of a firm
The dependency ratio measures
Economic burden of a country's working population to support children and elders
What are the underlying assumptions for convergence hypothesis? What does the hypothesis imply about the poor and rich countries? How do economists test the hypothesis?
Economies will move up their income ladder toward the same average income level. Assumes two countries have the same saving rate, population growth rate, and depreciation rate. Implies that: If all else equal, poor countries have the potential to grow more rapidly than rich countries. As countries become richer, growth rates tend to slow down. Since poor countries have the potential to grow faster than rich countries, they can catch up and close the gap in relative income.
Why do we use real GDP to compare the economic output rather than nominal GDP?
Economists are interested in if the output changed (not prices) -If you use nominal GDP you overstate the changes in economic activity -Nominal GDP - measured in current dollar value -Real GDP - constant dollar value
Malthusian Model (1766)
Ever-increasing population would continually strain society's ability to provide for itself. The population is infinitely greater than Earth's ability to produce subsistence for man-> people stuck in Malthus' population growth trap
if it costs more money to buy the same thing in another country than the currency is overvalued
Ex) Big Mac is $3.50 $1= 100 yen Big Mac is 400 yen Then the Yen is over valued
What are selective intervention policies?
Export Push Financial Repression Direct Lending Selective Promotion
What is export promotion?
Export promotion policies reflect the interest of national governments to stimulate exports. Subsidies, tax exceptions, and special credit lines are the main instruments used to promote exports. Aimed to improve trade performance in area
What are selective intervention policies?
Export push (promote exporting manufacturers Financial repression (low interest to promote lending) Direct lending (government indirect subsidized loans with low interest rates to select industries) Selective promotion (promote target industries)
How do you calculate net exports?
Exports - imports
To solve externalities
Externality is the positive or negative effect occurs to non- consenting bystanders and is not taken into account of pricing mechanism. Technology creates positive externalities (learning spillover effect). Therefore, private sector will be reluctant to be the first investor of the technology.
Economic growth depends on (Solow)
Factor accumulation and productivity growth
True or false: The flying-geese hypothesis describes how a low-income country can break away from the low-level equilibrium trap.
False
What are the options for an exchange rate system?
Fixed (pegged): dollarization, Currency Board, fixed peg arrangement Floating: managed floating, free floating
What is import substitution?
Focus on the production of consumer goods to substitute for imports. Use tariff barriers to block foreign goods Promote domestic producers in import competing sector in replacing imports.
Inter-regional catching up
Foreign Direct Investment (FDI) from the leading geese was the catalyst for industrialization in the following nations
Net capital outflow refers to the purchase of
Foreign assets by domestic residents minus the purchase of domestic assets by foreign residents
Which exchange rate system do Asian countries adopted?
Free floating: Japan, Philippines, South Korea Managed Float: Cambodia, India, Indonesia, Laos, Malaysia, Singapore, Taiwan, Thailand Pegged: China, Vietnam Currency Board: Hong Kong
Private saving
GDP - consumption - taxes)
What are the drawbacks of using GDP per capita as the well-being measurement?
GDP per capita is not a good well-being measurement because it does not take into account the price level.
What is the difference between GDP and GNP?
GNP includes income that American citizens earn abroad and excludes income that foreigners earn in the United States
What is the difference between GNP and GDP?
GNP is the total income earned by a nation's permanent residents. The difference between GNP and GDP is that GNP includes income that Americans earn abroad and also excludes income that foreigners earn in the United States. GDP excludes income Americans earned abroad and includes what foreigners make in the U.S.
How does the buffer stock work?
Government attempting to stabilize the prices of agriculture commodities. In a good weather year they would have a surplus of agriculture commodities which would drive price down meaning lower income for farmers government buys commodity from market and stores them as buffer stock to absorb surplus. While in a bad weather year they would have a shortage which increases the price government must sell commodity from buffer stock to maintain prices
Explain the market-friendly view of HPAEs' role of government on economic growth. What are the suggested policies under this view?
Government intervened systematically through different channels. Market friendly view created macro-economic management and pursuance of common and friendly policies which lead to higher accumulation, better allocation of resources. Suggested policies: Sound fundamentals Selective interventions Cooperation
How does export subsidy work? Who gains and who loses? What happen to domestic price after the subsidy? Study areas under the curves
Government trying encourage exports with 2 types of subsidies Cash subsidy: Gov pay cash to producer for each exported item Cost subsidy: Producer benefits from tax break, or low interest loan. Could also subsidize R&D or labor cost Who gains and loses Cash Subsidy: Block people from importing, domestic price rises by the subsidy given. Bad for domestic consumers because the price rises, good for producers and incentive to export. This reduces the domestic consumption because of the rise in price, but increases the quantity supplied creating a large surplus and good will get exported Cost Subsidy- Government pays part of production costs. Decrease in cost of production shifts domestic supply curve right and firms can supply more goods. This increases domestic consumption, exports expand, and the price stays the same which is good for consumers. Gov expenditure increase Differences- Largest loss in cash subsidy, smaller with cost consumers unaffected
In 2007, the price of rice increased 124% in a few months and caused the food price crisis because of a drought in Vietnam and Thailand. In terms of the buffer stock, what could the government do to stop prices of rice to increase further?
Governments could sell rice out from their buffer stocks to reduce the shortage pressure and bring price downward.
Which of the following public policies was used by the East Asian governments to promote human capital accumulation?
Governments devoted most of their education budget to basic education
According to "the Myth of Asia's Miracle," which of the following statements belong to Krugman's conclusion about East Asian economic growth?
Growth in East Asia would run into diminishing returns.
Growth accounting
Growth of total output = (Labor's share of total income x Growth rate of the labor force) + (Share of capital in total income x Growth rate of capital stock) + Technological progress
Why do East Asian governments use industrial policies? What would be justifications for such interventions?
HPAEs adopted the policy choice to promote sound fundamentals and at times they use selective interventions to jump start "target industry."
What has the HPAEs done differently in human capital formation compared to Latin America?
HPAEs allocated more of their education budget to basic rather than higher education. They gave priority to expand primary and secondary education
What does it mean if East Asian countries have high TFP growth? What does it mean if East Asia has very low TFP growth?
High - means that they have strong technological change over time. Low - means they don't have much technological change over time
What does HPAE stand for
High Performing Asian Economies
According to "fundamentalists" source of spectacular economic growth rates experienced by Singapore are due to
High Rate of capital accumulation
Elephant economy
High income level, low output growth rate, large and slow
HPAES
High performing asian countries.
Japan
High rate of TFP growth
According to Radelet, Sachs, and Lee (1997) empirical research paper, what are the factors that positively affect the economic growth?
High rates of government saving, trade openness, and maintenance of good institutions.
Would high saving and investment lead to economic growth? If so, is this growth rate sustainable?
High saving and investment would create economic growth, but growth is not sustainable because it will slow down and stop once they reach the new steady state equilibrium
In Solow Growth mode, how does saving rate affect the steady-state level of output per capita
Higher saving rate results in higher steady-state capital stock and higher steady state level of output per worker
Which country has the highest degree of economic freedom
Hong Kong
Which countries have the highest degree of trade liberalization
Hong Kong and Singapore
8 East Asian HPAES
Hong Kong, Indonesia, Japan, Malaysia, the Republic of Korea, Singapore, Taiwan, and Thailand
Who are the Asian Tigers
Hong Kong, Taiwan, South Korea, and Singapore
What does it mean if Gini coefficient is 1? How about 0? How about 0.5?
If the Gini Coefficient is 1 that is the highest level of inequality, 0 would be perfect equality, and 0.5 is still high
How the central bank maintain the exchange rate fixed at the target rate
If yen appreciates it is undervalued, central bank pegs the exchange rate, and sells yen while buying up US Dollars to foreign reserves if yen depreciates it is overvalued, central bank pegs exchange rate, buys yen to absorb surplus of yen, and sells US dollars in its foreign reserves
What is not included in GDP?
Illegal transactions, home productions, values of raw materials, sales of used items, and stocks and bonds
How HPAE governments increase agricultural productivity?
Improved infrastructure, improved agricultural technology, support agricultural research and development, increased access to loans for farmers, and land reform
In economics, what do we mean by saving? What does investment mean?
In a closed economic system, domestic saving equals domestic investment (every dollar financed comes from savings). In an open economy, domestic investment equals domestic saving plus foreign lending (if we rely too much on foreign lending to finance our investments, we will build up large foreign liabilities
How does the buffer stock work?
In a good harvest year, an increase in supply of agricultural product could drive price downward. Government could use money to buy excess supply (surplus) of agricultural commodity to prevent price to fall. A fall of agricultural product price implies lower income to poor farmers. On the opposite, in the drought time or poor weather year, a shortage of goods could drive price upward. A rise of agricultural price will cause food prices and raw material costs to rise, which could lead to cost-push inflation. Government could stabilize the price by selling agricultural commodities from their buffer stock to reduce the shortage pressure.
What is export promotion?
Incentive programs designed to attract more firms into exporting by offering help in product and market identification and development, pre-shipment and post-shipment financing, training, payment guaranty schemes, trade fairs, trade visits, foreign representation, etc.
What is moral hazard? How does it relate to Asian Crisis?
Incentive to take on risky options, because the cost of failure would be borne by someone else Banks enacted risky lending practices because they believed they would be bailed out, created the over-lending problem. Also took part in relationship lending with conglomerates, low quality investments
How does the saving rate affect the steady-state level of output per capita
Increase
How can a turtle economy escape the low level equilibrium trap
Increase domestic savings
How does export subsidy work? What will happen to the price of that good in the home country?
Increase equal to paid subsidy by government
Productivity growth
Increase in amount of output produced by: - give number of machine or workers - Improved efficiency (assembly line) - Technological change (new ideas, methods, inventions)
At beginning of production
Increase in capital/worker will increase output/worker at an increasing rate, according to the law of diminishing returns
At end of production
Increase in capital/worker will increase output/worker at decreasing rate, according to law of diminishing returns
If the demand for the home country's product increases by foreigners, what will happen to the home currency value?
Increase in currency value
When the home currency depreciates, what will happen to its trade balance (imports - exports)?
Increase in exports, decrease in imports
How does rate of population growth affect steady-state growth rate of output per capita?
Increase in population growth rate will lead to a decrease in output per capita --> negative growth rate of output per capita
How will savings rate affect steady state growth rate of output per capita?
Increase in savings rate produces high economic growth, however, growth will slow down and eventually stop once reaches new steady state -Shift from lower to higher steady state level of output causes temporary increase in growth rate, but does not permanently change it
How does export subsidy work? What will happen to the quantity exported?
Increased
How does technological progress affect the steady-state growth of output per worker and the level of capital per worker overtime
Increases
How does technological progress affect the steady-state level of output per worker and the level of capital per worker overtime
Increases
What is the Malthus' population growth trap?
Increases in population will eventually result in surplus of labor and ultimately high unemployment and low wages which leads to poverty which leads back to having large families
Investment-driven economies
Indonesia, Malaysia, Singapore
Investment-driven economies:
Indonesia, Malaysia, Singapore
Investment driven economies
Indonesia, Malaysia, and Singapore
Who are the 8 crisis-ridden countries during the 1997-98 Asian Crisis?
Indonesia, Thailand, South Korea, Philippines, Malaysia, Hong Kong, Japan, Singapore
What is industry targeting?
Industrial targeting = an optimal experimentation strategy of a government that lacks information about the set of industries in which the economy has comparative advantage with respect to the rest of the world.
Explain Kuznets inverted U-shaped curve
Inequality might first increase as a nation makes transition from agricultural economy to industrial economy. But as economy continues to develop, income inequality declines
an international organization headquartered in Washington, D.C., of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty
International Monetary Fund (IMF)
What is the Green Revolution
International effort to develop high-yielding varieties of rice
What is the Green Revolution?
International effort to research and development high-varieties of crops. The miracle rice IR-8 was an example of the success.
What did Southeast Asian nations do to develop agricultural sector?
Invest in rural infrastructures
What did Southeast Asian nations do to develop agricultural sector?
Invest in rural infrastructures (irrigation, transportation, electricity) Invest in health and education (enforce basic education) Land Reform (redistribution and redefinition of property rights over farm land, which solved land productivity to get most out of land) Microfinance (promote credit access to poor) Research and provide modern inputs (Green Revolution) Price Stabilization (prices normally fluctuate but they tried to keep them stable
What does it imply when a country has low life expectancy and high infant mortality rate?
It implies that the level of health in the country is very low
How does technological progress affect the steady-state level of output per worker and the level of capital per worker overtime?
It would increase both of these factors
Which country has the highest average level of education
Japan
Which country has the highest income per capita
Japan
according to the world bank report (1993) the HPAES which was NOT an example of the HPAES strategies to encourage exports
Keep minimum wages below the market-clearing levels to maintain competitiveness
How did Korea overcome the Oil Price Shocks?
Korean Government used the construction boom in middle east, dispatching workers to this region to stimulate economic growth
Flying Geese Hypothesis: Inter-industry sequencing
Labor intensive industry : capital intensive industry : technology intensive industry
Who tend to float?
Large Economies Closed economies (small portion of trade to GDP) Diversified trade Divergent inflation rates
What are the differences between Chaebol and Keiretsu?
Large business conglomerates, typically owned by a single family, operate with authoritarian management and with substantial government assistance. In Japan, a number of independent but related companies centered on and financed by a single bank and/or a joint stock company. That is, the institution (and no other) provides financing for companies in the keiretsu.
Scale Economies Problem
Large scale investment no single entrepreneur could raise large funds ex: SK govt built shipyards and started shipbuilding as the state production. Then they sold the shipbuilding business to private sector. Without the government stepping in to invest in this mega project, it would take a long time before any private firm could come up with enough funds to start the project.
Which is a Chaebol
Lg Group
Turtle economy
Low level of income, low output growth rate, small poor and stagnant
What are the problems in rural development?
Low productivity Limited access to credit markets
Under Korea's military regime, what was the country's top priority developmental policy? Explain how they implemented the policy
Made economic development top priority, They implemented the policy by creating the Economic planning board to: Plan, allocate budget, and attracting foreign capital
What were the impacts of the Asian Financial Crisis in South Korea? How did Korea overcome the Asian Financial Crisis?
Major corporations were on the verge of bankruptcy, causing corporate downsizing Asked for relief assistance from IMF They overcame the crisis by shutting down insolvent institutions or merging them, and restructured all the the corporate businesses and its policies. In turn Foreign exchange reserves rose to help pack back their loan from IMF
Managed floating exchange rate
Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies. It is also known as a dirty float
What is coordination failure?
Many projects require simultaneous investments in order to be viable and if these investments are made by independent agents, there is little chance that each agent would invest (if they act according to their best interest). Example: Consider China before having steel and car industries. Steel industry waits for car industry, while car industry waits for steel industry. Neither industry is profitable if it is established alone. If they are established together, then both are profitable. It is the nation's socially optimal to establish both. However, without explicit coordination between investment decisions, this outcome would not be obtained. No one will enter first because they will lose money if the other will not enter. This is the "coordination failure." Therefore, the government can bring them together and coordinate simultaneous investment plans.
What are the differences between market-based competition and contest based competition?
Market- based completion o Western style, small firms compete in market, no government interference, if firms cooperate it works out. Contest-based competition o Asian style, small number of competing firms, evenly matched firms like sports competition where everyone is same size and even playing field, government acts as referee Successful in Japan and 4 Tigers but not in ASEAN
How the speculative attack works? How does it lead to currency crisis?
Markets believe value of currency is misaligned with pegged value. Speculators know bank will run out of reserves at some point, which is the local currency float at fallen value. Speculators then sell their local currency denominated assets and convert them to US dollars before their assets were worthless. This uses up all the reserves and the bank must buy up the supply of local currency which causes depreciation of that currency. This causes contagion which spreads from country to country
What is maturity mismatch of banks' lending and borrowing?
Maturity mismatch happens when you borrow short term maturity loans and lend for long term. The asset is not liquid, and have to wait a while to collect it back. But your debt is in short term, and you must pay it back quicker than you collect money you lend to others
Which of the following is true (using the open economy saving-investment identity)?
NCO = NX
From the video, what is a rural development program in which villages were given cement to build whatever they want
New Community Movement
Did Samsung decide to become an electronic manufacturer based on its comparative advantage in electronic production?
No Mr. Lee & President Park's anti corruption campaign
According to the Solow model, the economy in the steady state will have:
No change in capital stock.
In which part about HPAEs' economic growth that Paul Krugman disagreed with the World Bank (1993) report?
No miracle in East Asia growth, just capital accumulation, and that there was not high TFP, or substantial technological progress
Unemployment Rate
Number of unemployed/labor force) x 100
When the home currency appreciates, what will happen to trade balance?
One Japanese yen gets fewer U.S. dollars. The U.S. products become relatively more expensive and Japanese products become relatively cheaper. Then the U.S. exports will decrease; imports will increase; and lead to trade deficits for the U.S.
According to empirical study by Radelet, Sachs, and Lee (1997), which of the following factors is positively related to economic growth?
Open to international trade
What is Solow residual?
Or "technological progress" or "The growth in total factor productivity (TFP)" - it is the measure of the efficiency, technology, and other influences on productivity.
An economy's production function
Output = F(Physical capital, Labor units
Purchasing Power Parity
PPP adjusted real GDP is the sum of all goods and services produced in the country valued at prices prevailing in US --THings are much cheaper in developing countries, more expensive in established nations
In which part about HPAEs' economic growth that Paul Krugman disagreed with the World Bank (1993) report?
Paul Krugman believed that there is no miracle behind East Asia's growth but simple capital accumulation.
Who are the discouraged workers/how do they affect true level of unemployment
People who have been out of work for a long time and given up looking -They would answer that they are not looking, so put in "not in labor force", but if they got a job they would accept it
What does it mean if a Gini coefficient is 0
Perfect equality
What are the problems in rural development? How do Asian governments try to alleviate such problem? Give examples of agricultural development policies.
Problems with Rural Development including: Low productivity (low yields, obsolete technique/equipment, high seasonal unemployment which leads to poverty Limit access to credit market (tenant farmer can't get loans to fund new investments, they turn to informal credit market)
How does export subsidy work? Study areas under the curves, who gains and lose from the subsidy?
Producers
import tariff work Study areas under the curves, who gains and lose from the tariff?
Producers win Consumers and govt losses
What are the three patterns of the Flying Geese Formation
Product life cycle, interindustry sequencing, and interregional catching up
What are three patterns of Flying Geese formation? Explain each pattern
Product- life cycle: • Stage 1: Import manufactured consumer goods • Stage 2: Import substitution o Domestic industry starts to produce previously imported consumer goods. o Still import the capital goods to produce those consumer goods • Stage 3: Start to export the manufactured consumer goods o Export promotion • Stage 4: Consumer good industry completes catching-up process o Start to produce capital goods that used to import Inter-industry sequencing: • Stage 1: Labor-intensive industry (light industry such as food, textile) • Stage 2: Capital-intensive industry (heavy & petrochemical industry such as steel, auto, shipbuiliding) • Stage 3: Technology-intensive industry (precision and electronic, computers, and semi-conductor) Inter-regional catching up: Alignment of nations along the different stages of development: it shows a hierarchy of countries at different stages of industrialization
What is coordination failure?
Projects require simultaneous investments by independent agents, small chance each agent invests Industries being established together will make both profitable. But neither will enter first because they will lose more money if other enters Government must step in to coordinate simultaneous investment plans to establish both and bring them together
Why fix the exchange rate?
Pros o Limits fluctuations of exchange (good for trade and foreign direct investment) o Provide price stability (no hyperinflation) Cons o Lose control of domestic monetary policy (cant be used in emergency aka recession) Could lead to currency crisis (when gov't intervenes to fix rate it builds up more pressure for speculative attacks)
Why do economists prefer to use real GDP over nominal GDP to compare economic output?
Real GDP takes inflation into account. When comparing two different time periods, nominal GDP will show how prices have changed, while real GDP will show if output has changed.
What is the rate of natural increase?
Refers to the difference between the number of live births and the number of deaths occurring in a year, divided by the mid year population of that year, multiplied by a factor usually 1000. It is equal to the difference between the crude birth rate and the crude death rate
How did Korea finance its restoration after the war?
Right after the war Korea was too reliant on foreign aid, and when the majority of the restoration was complete, foreign aid declined and growth stalled
Give examples of agricultural development policies.
Rural Credit Program -designed for poor clientele, small amount of loans, and exempt collateral requirements Small Enterprise Program -designed for women in rural area to start business (from survey most of business are silk weaving, beauty salon, flower shops, and craft stores). -empowers women
Give examples of companies that are Chaebol. Which companies are Keiretsu?
Samsung, Hyundai, LG Toyota, Mitsubishi
How HPAE governments increase saving? How about investment?
Saving Keep interest rates on deposits high and stable. Lower transactions costs to access banks for rural savers (ex. Postal saving in Japan). Limit banking competition and impose many regulations to ensure stability and solvency in banking system. Impose high taxes on luxury consumption to discourage spending. Impose mandatory pension saving Governments run budget surplus. Investment Create infrastructure that complement to private investment (ex. Build industrial zone). Create investment-friendly environment Tax break for approved manufacturing factories. Subsidize low-interest direct loans to investors. Control capital input price low. Repress interest rate on loans to increase demand for credits.
In economics, what do we mean by saving? What does investment mean?
Saving: Consuming less out of a given amount of resources in the present in order to consume more in the future. Saving, therefore, is the decision to defer consumption and to store this deferred consumption in some form of asset. Investment: The purchase of goods that are not consumed today but are used in the future to create wealth.
What is Green Revolution?
Science to help solve food crisis in Asian and reduced poverty Investment into international agriculture research to help developing countries. This included Rice and Wheat. International Rice research Institute was first to invest and created high yield varieties which led to high productivity and increase in demand which helped fund more research into fertilizer, pesticides, farming facilities
How does the export cartel work?
See the graph. Cartel works like the monopoly. The group can maximize profit by setting quantity at MR=MC and setting price at the demand curve. The outcome of the cartel compare to the perfect competition is higher price and fewer quantities.
If the government wants to fix the currency value to its initial level, which currency they will have to buy or sell? currency appreciation
Selling domestic currency Buying foreign currency
What does panic mean in the crisis contagion?
Similar to "bank run" idea. overreaction by foreign lenders when they scramble to find the exits. accurate information is costly → herding behavior pull back from all investments in countries with similar problems
Why is cooperation between business and governments important in East Asia?
Solve scale economies problem Solve Externalities
What are policies that gear toward sound fundamentals?
Sound Fundamentals Selective Interventions Cooperation
What are policies that gear toward sound fundamentals?
Stable macro-economy: Keep budget deficit manageable Low inflation Foreign debt under control Exchange rate stable Respond quickly to economic shocks High Human capital Healthy fiscal system Limit price distortion Open to trade Develop rural and agricultural sector
Stages of product life cycle
Stage 1: Import manufactured consumer goods Stage 2: Domestic industry produced previously imported consumer goods (still import cap goods to produce consumer goods) Stage 3: Export consumer goods Stage 4: Consumer good industry completes catching up process (produce capital goods that used to import)
Stages of inter-industry sequencing
Stage 1: Labor-intensive industry Stage 2: Capital-intensive industry Stage 3: Technology-intensive Stage 4:
After losing competitiveness in the light industry, what industries did government invest in? Were these industries successful?
Steal, Coal, Chemicals, Machinery, and Ship Building and it was successful
Productivity-driven economies:
Taiwan, HK, South Korea, Thailand
Productivity driven economies
Taiwan, Hong Kong, South Korea, and Thailand
How does import tariff work? Who gains and who loses? What happen to domestic price after the tariff? Study areas under the curves
Tariff is tax on Foreign goods to block foreign imports. This raises the price and promotes domestic production. Domestic Producers win, consumers lose out on surplus from cheaper foreign goods Domestic prices rise the same amount the (foreign import paid in tariff), but domestic doesn't have to pay tariff so they make extra profit. So they can produce more and sell at higher price Excess demand the country cant supply decreases and quantity of imports fall -b-d= Deadweight loss loss of efficiency...what the consumer used to get)
How does technology create market failure?
Technology creates positive externality. Externalities are side effects of an action that are not compensated or paid through the market‟s price mechanism; therefore, there is some inefficiency in allocating resources. Technology incurs high cost to develop it, but the benefits from it are shared by many people. So, the person who develops the technology pay high cost without receiving compensation from others who use the technology. For example, YouTube is starting a great way to communicate video clips. It has not made any profits yet, so we have not seen similar websites copying YouTube business idea. However, Starbuck became a big hit and afterward you see many coffee houses popped up everywhere. The first entrant develop business plan. If he fails, he bears the cost fully and no one enters the market. If he succeeds, others will enter the market and share the profits. So, in high-tech field, government may have to act like the first entrant to share the large investment fund in developing technology.
How does the saving rate affect the steady-state growth rate of output per capita
Temporary growth
What are the external factors that caused the asian crisis?
Terms-of-TradeShocks: Panic → Global Contagion
How did Radelet, Sachs, and Lee (1997) try to test the convergence hypothesis? What did they find?
Test for convergence, the test which factors contribute to economic growth
What were the major light industries in the beginning of Korea's industrialization? How did government support the light industry and promote export?
Textiles, wigs, and needle work The government supported his industry by fostering free enterprise
What did happen to Thai baht before the currency crisis in 1997? Explain how the speculative attack exacerbates the crash of Thai baht.
Thai baht was fixed against the U.S. dollars for more than two decades. Even though the demand for the U.S. capital goods had increased significantly, Thai baht continued to remain fixed. Baht was overvalued. The crisis started with Thailand when Thai baht was attacked by speculator. Speculators knew that at one point the Bank of Thailand would run out of U.S. dollar reserves. When that happened, Thai baht would be forced to float and significantly fallen in value. Therefore, speculators wanted to sell all baht-denominated assets and converted everything into dollars before their assets worth nothing. By doing so, the supply of Thai baht kept shifting further and further to the right, causing greater surplus of baht. Bank of Thailand had to sell more dollars and buy up more baht. The dollar reserves depleted sharply. From the picture below, you can see that the dollar reserves had disappeared in May 1997 in Thailand. The speculation attack has completely drained the dollar reserves in the Bank of Thailand in July 1997. Bank of Thailand had to turn to IMF (International Monetary Fund) to borrow more money to defend Thai baht depreciation.
How unemployment is measured and how the unemployment rate is calculated
The Bureau of Labor Statistics (BLS) surveys 60,000 households a month and the BLS places each adult aged 16 or older into either employed, unemployed, or not in the labor force. The unemployment rate is the percentage of the labor force that is unemployed
Two price indices are considered in this class: CPI and the GDP deflator. Explain the differences between the two measures of the price level.
The GDP deflator reflects the prices of all goods produced domestically, while the CPI reflects the prices of all goods bought by consumers. The CPI compares the prices of a fixed basket of goods over time, while the GDP deflator compares the prices of the goods currently produced to the prices of the goods produced in the base year. The goods and services included in the GDP deflator changes automatically over time as output changes
How Gini coefficient is calculated? What does it represent?
The Gini coefficient is a measure of inequality based on the distance between the Lorenz curve and the 45 degree line. It is taken as the ratio of the area between the Lorenz curve and the 45 degree line to the area below the 45 degree line
Which of the following theory explains a relationship between the level of development and income distribution?
The Kuznets inverted U-shaped curve
What is the Lorenz curve? What does it represent? What can you tell about the shape of the Lorenz curve?
The Lorenz curve plots the cumulative share of income versus the percent of households considered in the cumulative share. It is used to measure inequality. The shape of the Lorenz curve should be as close to a 45 degree line as possible, and the distance between the curve and the 45 degree line is a measure of inequality.
What is the price index? How is it used to calculate the inflation rate?
The Price Index is the overall price level in the economy. It is used to calculate the inflation rate because when compared over time we can see the change in price
What did the World Bank conclude about the TFP growth in the HPAEs and why is there controversy?
The World Bank said that the HPAEs had very high TFP growth, however some researchers disagree with their conclusion due to the fact that using different methods you can reach a different conclusion.
What is the total factor productivity?
The amount of output that can be achieved with a given amount of factor input. It measures how efficient resources are being used.
Explain the market-friendly view of HPAEs' role of government on economic growth. What are the suggested policies under this view?
The asian economies picked the revisionist view it seems, where they chose to extensively and selectively promote individual sectors. Along with trying to create "market friendly interventionism" HPAE focused on getting the basics right and thee policy choices. -Sound Fundamentals -Selective Interventions -Cooperation
If the level of investment exceeds the depreciation...
The change in k is positive which means that capital per worker will rise
Kuznets Curve, what is the underlying mechanism for the rise in income inequality
The difference in labor payments between agriculture and industry
Dependency ratio
The economic burden that the productive portion of population must support Dependency ratio = (youth population + elderly population)/working population Ex-China - increasing aging population with fewer productive working population
Credit market policy Korean gov. used to promote exports during the 1970s?
The gov. used low-interest-rate loans as a form of indirect subsidy to exporters.
NOT true about HPAEs
The government runs unusually high budget deficits
From the growth accounting, what factor(s) play an important role in HPAEs' economic growth?
The growth rate of the labor force The growth rate of capital stock - rate of capital accumulation Labor's share of total income - share of total income that is allocated to workers The share of capital in total income - share of total income that is allocated to capital's owners Solow residual or technological progress
The Solow residual is:
The growth rate of total factor productivity
What does it mean if a Gini coefficient is 0.5
The inequality is severe and needs to be brought down
Suppose that a country in a steady state implements policies to increase its saving rate. After the new steady state is reached
The level of output per worker will be higher than before
What is the life expectancy?
The life expectancy is the measure and estimation of how long the citizens of a country will live
Define the term Gross Domestic Product. Explain carefully which transactions in the economy are included in GDP
The market values of all final goods and services produced within a country during a given period of time
Which of the following statements is CORRECT about Radelet, Sachs, and Lee (1997) findings?
The natural resource abundant country tends to have slow economic growth.
How does import tariff work? What will happen to the price of that good in the home country?
The policy is done by blocking foreign goods by imposing import tariffs and quota → raise the prices of imports and allow domestic producers to charge higher prices. Then, domestic producers produce goods to replace imports.
Why does the population growth rise at the initial stage of development?
The population growth rises at the initial stage of development because death rates decline first in fast pace, while the birth rate remains the same. This time lag results in an increase in population
What was the main problem of the first 5-year economic plan? How did they overcome this problem?
The problem was the acquisition of funds, but they received inflow of capital from Germany in exchange for miners and nurses...Government obtained loans by pledging workers salaries as collateral
What does the Lorenz Curve show
The relation between the cumulative share of income versus the percent of households considered in the cumulative share
What does the Kuznets inverted U-shaped curve look at
The relationship between economic growth and income inequality
What is maturity mismatch of banks' lending and borrowing? How does it related to the Asian financial Crisis?
These existed because both domestic banks and their client firms had been issuing dollar-denominated liabilities to finance their investments, whose returns were denominated in local currencies. Presumably, they held these unhedged positions either because they had few other options, or, because at the time, they assumed that the pegs would hold.6 In any event, once the pegs collapsed, their balance sheets deteriorated severely, leaving them unable to service their debt obligations when their creditors refused to roll over their dollar liabilities.
According to World Bank report (1993), what did the report conclude about HPAEs' income inequality? How did the World Bank measure the income inequality in their report?
They concluded that HPAEs proportion of people living below the poverty line and the number of poor had declined sharply. They measured it calculating for inequality by taking the income of the richest 20% and divided it by the income of the poorest 20%.
Describe how Korea, one of the poorest country in the world, has gone through technological transformation and become the 12th biggest economy in the world.
They improved education to ensure skilled workers
Which of the following was NOT an example of the HPAEs' strategies to encourage exports?
They kept the minimum wages below the market-clearing levels to maintain competitiveness in their labor costs.
What are the causes of the Asian Crisis?
Three Main Factors -Weak Fundamentals -External Shocks -Panic
What is the goal of a Central bank's official intervention in foreign exchange market?
To maintain the exchange rate at a constant level by either buying or selling currency
What are the purposes of microfinance?
To promote credit access to the rural poor. Government lending was targeted at specific groups of farmers, specific areas or regions and specific crops at subsidized interest rates. This was known as directed credit.
Why is cooperation between business and governments important in East Asia?
To solve scale economies problem- no single entrepreneur could raise large funds To solve externalities- (Technology creates positive externality) no one wants to be first one to develop a technology because everyone will copy it and share the profits.
What is TFP and what does it measure
Total Factor Productivity measures how efficient resources are being used
TFP
Total factor productivity: amount of output tha tcan be achieved with given amount of factor input. Usually technological growth or gains in efficiency. Growth high in East Asia
What does it mean if the Gini Coefficient is 0
Total income equality
What does it mean if the Lorenz Curve is straight
Total income equality
What is infant industry argument?
Trade protection- production costs of a new undeveloped industry are higher than established foreign competition. Initial protection from foreign competition helps the domestic industry get off the ground and caught up.
True or false: The flying-geese hypothesis characterized the sequential "take-off" of Asian countries in terms of their industrialization, which is similar to wild geese fly in orderly rank of an inverse V shape formation.
True
True or false: The flying-geese hypothesis has generated positive sentiment to foreign direct investment among Asian nations.
True
How can a turtle break away from its economic trap?
Turtle economies have to increase domestic saving (giving up current consumption to increase investment) -In absence of domestic saving, investment could be raised by foreign aid, foreign direct investment (FDI) or foreign borrowing
What is the Neo-Malthusian Trap
Turtle economies succeed in increasing growth rate but do not well manage family planning
How did Lim classify Asian economies? What are the characteristics of each country group?
Turtle economies: o Low level of income o Low output growth rate o Small, poor, stagnant · Horse economies: o Middle income level o High output growth rate o Lean and fast · Elephant economies o High income level o Low output growth rate o Large and slow
What are underlying assumptions for convergence hypothesis?
Two identical economies (having same prod fund, same saving rate, same depreciation rate, and same population growth) will share the same steady-state level of capital per worker and output per worker -Regardless of where these economies start (low or high level) they will converge to the same level (y*, k*) in the steady state. -Economies wil move up their income ladder toward same average income level -Once the economy reaches its steady state level, economic growth simply matches the population growth - there's no chance of sustaining an increase in average income
When the home currency depreciates, what will happen to trade balance (imports - exports)?
US goods are cheaper relative to foreign. Exports rise, imports fall, net exports increase
When the home currency appreciates, what will happen to trade balance?
US goods are more expensive relative to foreign. Exports fall, imports rise, net exports decline
Labor force includes:
Unemployed and employed
How severe was the effects of the crisis? On exchange rate, on stock market, on economic output, etc. (all had severe effects)
Very severe effect on exchange rate (all over 20%, Indonesia at 83%, Thailand 53%) The stock market crashed hard cause of panic dump selling stocks (Indonesia fell 88% in one year, others in the regions fell which is called contagion
Why do we use Purchasing Power Parity adjusted real GDP per capita to compare across different countries? What problems with the real GDP per capita in US $ measure that led to the introduction of PPP adjustment?
We use PPP to compare across different countries because prices differ across different countries. The problems with the real GDP per capita that led to the introduction of PPP adjustment was that goods and services were priced differently in different countries
Why do we use real GDP to compare the economic output rather than the nominal GDP?
We use real GDP because economists want to know if output has changed and not prices. Total spending can rise because the economy may be producing a larger output of goods and services or goods and services could be selling at higher prices. So if we are looking to see if output has changed over time, we should focus on real GDP
What are the causes of Asian Crisis?
Weak fundamentals ♣ Dependence on massive capital inflow ♣ Chronic current account deficits (imports > exports) ♣ Fixed exchange rate system (speculative attacks and let currency float) ♣ Weak financial sector (risky behaviors by banks) External stocks ♣ Terms-of Trade Stocks (fall in semiconductor prices, hike in oil price) ♣ Swing of yen/dollar exchange rate Panic (Global contagion) Overreaction by foreign lenders to exit quick, like bank runs, accurate info is costly
Market-based competition:
Western Style Many Small Firms Compete in Market No Govt interference
Make sure you understand what the exchange rate depreciation and appreciation are.
When a currency appreciates, it is said to strengthen; when a currency depreciates, it is said to weaken. Definition of appreciation: an increase in the value of a currency as measured by the amount of foreign currency it can buy. Definition of depreciation: a decrease in the value of a currency as measured by the amount of foreign currency it can buy.
What is the condition for the steady-state equilibrium?
When change in K is 0 we are in a steady state. The steady state represents the long-run equilibrium of the economy
What is the low level equilibrium trap
When poor countries do not have much to spare in investment in infrastructure
In the Solow model, how does the saving rate affect the steady-state growth rate of output per capita?
Will result in temporary growth
How did over-lending and over-borrowing relate to the Asian Crisis?
With the sudden stop That saw the "sudden stop" of capital to Asia and subsequent reversal of that capital. This is directly related to the liquidity crisis where depositors' fears about insolvency, well-grounded or not, become a self- fulfilling prophecy as their withdrawals en masse bring the bank to ruin.
Production function (GMS)
Y=F(L,K) *assume constant returns to scale->doube input, double production zY=F(zL,zK)
Did IMF bailout the Asian economies? Why controversies?
Yes - all but Malaysia Governments in crisis countries were bitterly divided on whether to bow to the demands of the IMF or try to survive alone by imposing protectionist controls on trade and capital movements. Malaysia decided to reject the IMF rescue and imposed capital controls to stop investors from taking money out of Malaysia.
Would high saving and investment lead to economic growth? If so, is this growth rate sustainable?
Yes it does, no it is not
Would high saving and investment lead to economic growth? If so, is this growth rate sustainable?
Yes, it would, it would not be sustainable at a certain point they experience diminishing returns.
depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy.
Trade flow model of exchange rate determination
a. Demand for local currency (in terms of US dollars) - If American want to buy Japanese products or invest in Japan they buy Yen b. Supply of local currency (in terms of US dollars)- Japanese want to buy US products or invest in US they sell Yen to get US $ c. Shifting the curve: change in taste for the domestic goods - ex. US doesn't want Japanese cars anymore, shifts demand curve for yen left, which causes decrease in price. -ex. Japan wants more American cars, sell more yen to get American dollars. Supply of yen in foreign exchange market increases which shifts supply right, this causes price of yen to fall. d. Depreciation/appreciation of the local currency (if floating) When US dollar depreciates: one yen gets more US dollar; US products cheaper and Japanese products are more expensive; US exports increase, import decrease which lead to trade surplus When US dollar appreciates: one yen gets fewer US dollars, US products more expensive and Japanese products cheaper, US exports decrease, imports increase which lead to trade deficit.
appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy.
Examples of successful Korea's industries
automobiles, semi-conductor, information technology, steel
A recent study (Young 1992, Kim & Lau 1994, Krugman 1994) suggests that the spectacular growth rates of output experienced by Hong Kong, Singapore, South Korea, and Taiwan are largely due to:
capital accumulation from rising saving rates.
An increase in capital is called:
capital formation or investment
High savings and investment rates
common characteristic of HPAEs. Savings exceed investment for most developing East Asian economies, making them net lenders.
What is the fixed (pegged) rate system?
country's exchange rate fluctuates in a narrow band against some base currency over sustained period (> 1 year). fixed rate Government actively intervenes in foreign exchange market to peg the rate ♣ Who adopted: Ecuador, El Salvador, Panama use US dollar, also European Union
Exchange rate lease flexible
currency board
In the Solow model, how does the rate of population growth affect the steadystate growth rate of output per capita
declines
import tariff work What will happen to the domestic consumption?
decrease
PPP adjustment is to correct for
different prices of the same bundle of goods and services across countries
if domestic currency is undervalued the central bank must sell _______ by purchasing ___________ assets
domestic, foreign
Dependency ratio
economic burden that the productive population must support DR: (youth+elderly)/working population
Human capital
education of people= secondary school
buffer stock
excess of rice
What is the managed floating system?
exchange rate is floating, government wiling to intervene with unspecified targets
Openness
exports + imports)/GDP
income distribution level 1- perfect inequality 0- perfectly equal
gini coefficient
Import substitution
gov. policies which aim at replacing imports of foreign products with the domestic production of the same goods
NOT true about asian-style capitalism
government has ownership in all manufacturing firms
Direct lenindg
government indirect subsidized loans with low interest rate to selected industries
HPAES with tremendous output growth typically had
high savings and investment rates
The HPAEs which experienced huge output growth during the second half of the twentieth century had
high savings and investment rates
What is moral hazard? How does it relate to the Asian Crisis?
incentive to take on risky options, because the cost of failure would be borne by someone else. -The more IMF bails out countries, the more likely countries are to slip into crises in the future. Overly deregulated banking policies
Absolute poverty
income of less than $1.25 a day
Income inequality
income of the richest 20% divided by income of the poorest 20%
How does export subsidy work? What will happen to the domestic production?
increase
import tariff work What will happen to the domestic production?
increase
Diminishing returns to capital
increases in the capital stock increase output by ever smaller amounts
In the steady state of the Solow growth model, an increase in the savings rate
increases output per worker and increases capital per worker
An increase in capital is called
investment and capital formation
When a currency appreciates
it is said to strengthen
when a currency depreciates
it is said to weaken
An advantage of adopting floating exchange rate system is that
it prevents against currency speculation and currency crisis
If the demand for foreign goods increases by the domestic citizens, what will happen to the home currency value?
it will depreciate
How does technological progress affect the steady-state growth rate of output per worker?
it would increase
Condition for steady state equilibrium
k*: New investment equals depreciation Change in k=0 (no change in capital per worker) The steady state represents the long-run equilibrium of the economy
Malthus population growth trap
large family --> high population growth --> large labor supply --> surplus of labor --> unemployment and underemployment --> low productivity and low wages --> poverty --> repeat
Human Capital Formation
long-run labor supply theory: human capital as investment World Bank: 1 more year of schooling in South Korea=6% increase in individual earning
What is the floating exchange rate system?
market determined ♣ Country exchange rate fluctuates in a wide range ♣ Government makes no attempt to fix it against any other base currency ♣ A result of demand and supply in foreign exchange market
What is the free floating system?
market supply and demand, no government intervention
(Hypothesis) Landlocked
negative link between landlocked and economic growth
According to the Solow model, an economy in steady state will have:
no change in capital stock
(Hypothesis) Growth of working-age population
positive link
(Hypothesis) Life expectancy
positive link
(Hypothesis) Quality of public institutions
positive link
(Hypothesis) Govt saving
positive link to economic growth
Explain why the two approaches of calculating GDP produce the same estimate of GDP.
produce the same estimate because it is the same flow of money in the economy. For an economy as a whole, total income must equal total expenditure
Export Push
promote exporting manufacturers
Selective promotion
promote taret industries `
when domestic currency is initially overvalued in a fixed exchange rate regime the central bank must
purchase domestic currency, meaning that it loses international reserves
Increase in y (GMS)
represents economic growth and improvement in country's standard of living
Financial repression
set interest rate slightly below equilibrium rate to remote borrowing
Big Mac Index: calculate the PPP-theoretical value of a currency. (Law of One Price)
set local values equal to each other, divide each side by dollar amount
Inter-regional catch-up
shows hierarchy of nations at different stages of industrialization
HPAE
stands for High Performing Asian Economy There are 8 - Japan - Malaysia - South Korea - Taiwan - Singapore - Hong Kong - Thailand - Indonesia
(Hypothesis) Natural resource abundance
strong negative (b/w resource richness and economic growth->supports natural resource curse
(Hypothesis) Tropics
strong negative link between being in tropics and economic growth
(Hypothesis) Openness
strong positive link to economic growth
What is the sudden stop? How does it relate to the Asian Crisis?
sudden or large drop in capital inflow With increasing globalization and financial integration, capital account problems could make a country highly vulnerable to shocks. Problems included declining foreign reserves, excessive short-term foreign debt, debt maturity and currency mismatches, and capital flight.
Public Saving
taxes - government purchases)
In the Solow model with technological progress, persistently rising living standards can be explained by
technological progess
Economic Growth in Asia
test growth theory using Gy=a+bX-y0
Where did the asian crisis start
the Asian crisis started in Thailand after the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its currency peg to the U.S. dollar.
When an economy becomes more developed it will experience demographic changes such as
the birth rate falls after the decline in death rate
The GDP deflator adjusts nominal GDP for:
the general level of prices over time
Natural resource curse
the natural resource abundant country tends to have slow economic growth
What is IMF conditionality?
the policies a member is expected to follow to ensure that the member will overcome its payment problems and able to repay back the funds.
Absorption Approach - IMF conditionality
the policies a member is expected to follow to ensure that the member will overcome its payment problems and able to repay back the funds. IMF offers financial support in exchange for a government commitment to certain change in domestic policies, usually tighten fiscal and monetary policies as well as reduce current account deficits
What are the three vulnerabilities in Yellen (2007)?
the pursuit of risky lending practices by financial intermediaries perceptions that the governments of these nations stood ready to intervene to forestall bank failures pegged exchange rate regimes, which are subject to speculative attacks
What is import substitution?
trade and economic policy which advocates replacing foreign imports with domestic production. Reduce foreign dependency through local production, block foreign goods through tariffs which raise import prices and allow domestic producers to charge higher
(Hypothesis) Education
weak positive link (b/w education and economic growth)
If East asian countries have rapid growth in the total factor productivity as suggested in the World Bank report (1993) then these countries:
will continue to have high rate of economic growth without slowing down
Per worker function (GMS)
z=1/L (Y/L)=F(K/L,1) - Output per worker is function of capital per worker-> y=f(k) - y= output per capita and income per capita (GDP per capita)
Saving-investment identity: closed vs. open economy
• Closed: o (Y-C-T) + (T-G) = I o private + public = investment o S = I • Open: o (Y-T-C) + (T-G) - I = NX o private + Public - investment = Net Exports o S-I=NX
What would shift demand curve for Japanese yen to the right?
US demand for products imported from Japan significantly increases as Japan culture becomes more popular in the US
If a US citizen buys a TV made in Korea by a Korean firm
US exports decrease but US GDP is unchanged
Rule of 70
a variable thats grows at a rate of "x% per year" will double in value in 70/x years
Poor countries tend to grow
faster than rich countries this is called the convergence effect
Chaebol is
large business typically owned by a single family. ie; samsung
Gini coefficient
measures income distribution
French demand for American exports rises, then
the $ should appreciate relative to the euro
According to the Solow model if the saving rate increases
the economy will grow at a faster rate until a new higher level of steady-state capital per worker is reached
Solow residual is
the growth rate of total factor productivity
Net Capital Outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreign residents
Land Reform
the redistribution of property or rights in land for benefits of landless, tenant farmers
CPI inflation calculation
(CPI year 2 - CPI year 1/ year 1 CPI) x 100
GDP growth rate formula
(GDP year 2 - GDP year 1 / GDP year 1 ) x 100
Trade Openess
- Openness = (Exports + Imports) / GDP - measures the degree of free trade or trade liberalization, we can simply compute the share of import volumes and export volumes to the size of the economy
How have the HPAE governments increased agricultural productivity
- improved infrastructures such as roads, electricity, and irrigation system - improved agricultural technology - support agricultural R&D - Create lending markets to farmers - Land reform
Elephant Economy
-high income level -low output growth rate -big and slow
Turtle Economy
-low level of income -low output growth rate -small, poor, stagnant
What were the "three vulnerabilities"
1. Risky lending practices by financial institutes 2. Fixed exchange rate regime 3. Capital influx due to the perception of guaranteed intervention by these nations' governments to rescue failing banks
Malthus vicious circle of the poverty trap indicates
A country is poor because it has a high population growth rate, which creates a surplus of labor and lower wages
The current rapid growth of income per worked in China could be due to:
A rise in productivity or A fall in labor force growth rate
Which country NOT affected by 1997 Asian crisis
China
What is IMF conditionality?
Conditionality: the policies a member is expected to follow to ensure that the member will overcome its payment problems and able to repay back the funds. IMF offers financial support in exchange for a government commitment to certain change in domestic policies, usually tighten fiscal and monetary policies as well as reduce current account deficits.
Suppose that Chinese government is contemplating on promote both steel and automotive industries. If they are established simultaneously, then both industries will become profitable and benefit the country as a whole (having one industry without the other will not become profitable). Without an explicit government support in both industries, there is little chance that any entrepreneur would invest and thus neither industry will be established. Which of the industrialization problem does China face?
Coordination failure
When certain desirable activities fail to take place because of limitations within the economic system which means they fail to coordinate the plans, When a country wants to develop something that would be profitable but cannot obtain proper investment etc..
Coordination failure
What are the differences between currency board, pegged, and dollarization?
Dollarization = adopt someone else's currency completely. The country gives up its own currency. Currency Board = explicitly written in Constitution that the country will fix exchange rate with 100% foreign currency backing. So, there is no chance for speculation. In worst case, they can replace their currency with the foreign money they have in reserves. Pegged = fix exchange rate with one or a basket of currency. The government will intervene, but they are not required by law to defend the exchange rate.
Labor force
Employed + Unemployed
Central feature of the Bretton Woods system?
Every country fixed its exchange rate to the U.S. dolalr
What does Net Exports represent?
Exports - Imports
How does the coordination between firms and government resolve the externality problem?
Externalities are effects occur to bystanders and they are not priced in the markets. Examples of negative externalities are pollution, noisy neighbors, and cellphone ringing in the classroom. The market tends to produce too much outcomes with negative externalities, because the cost of the externalities are spread among bystanders, while the person who create the effects does not bear the cost. Examples of positive externalities are education, vaccination, a beautiful garden in a neighbor's yard, and technology. The person who creates the effect incurs the cost alone, but the benefits are share among bystanders. As a result, the markets tend to produce too little activities with positive externalities. How can the firm-government coordination reduce the market failure (i.e. inefficient allocation of resources) when there is externalities? The government can subsidize the costs (cost of cleaning up pollution, cost of developing technology) to the firms to alter incentive - produce more when it creates positive externalities or produce less when it creates negative externalities. That is why the government subsidizes your college tuition fees to lower your costs of acquiring a college degree, so that you will get education and start the knowledge spillover effects in community.
A floating exchange rate or fluctuating exchange or flexible exchange rate is a type of exchange-rate regime in which a currency's value is allowed to fluctuate in response to foreign-exchange market mechanisms. A currency that uses a floating exchange rate is known as a floating currency.
Floating exchange rate
Which HPAE has the highest degree of economic freedom
Hong Kong
Which HPAE has the highest degree of trade liberalization
Hong Kong
Asian Tigers
Hong Kong Taiwan South Korea Singapore
Which countries in High-Performing Asian Economies adopted currency board? Which ones adopted free floating?
Hong Kong = currency board. Free Float = Japan and South Korea. Rest of HPAEs = managed float.
Suppose that South Korea decided to run a national experimentation by promoting variety types of heavy industries. The government will continue to support the industries that are able to export and stop any support for the industries that fail. What type of industrial strategy does South Korea pursue?
Industrial targeting, because the government does not know the country's true comparative advantage.
What is infant industry argument?
Infant industries argument -- an argument in favor of protecting the domestic industries through government backing, help, and intervention. This argument has been observed to be followed more often by the developing countries which possess comparatively backdated and traditional industries. In such cases, if these industries are subjected to the international markets, then their products would not be able to compete with the price offered by the highly mechanized and advanced industries producing the same output. In such uneven playing fields, the domestic, traditional, and backward industry would require government protection and backing either through tariff protection or subsidy on a temporary basis.
What is the Green Revolution?
International effort to research and development high-varieties of crops. The miracle rice IR-8 was an example of the success.
Which HPAE has the highest average level of education
Japan
Which HPAE has the highest income per capita
Japan
What is keiretsu?
Keiretsu (Japan) is a loose conglomeration of companies organized around a single bank for their mutual benefit. The companies sometimes, but not always, own equity in each other.
The Solow growth model predicts that countries with higher populations growth rates will have:
Lower steady-state level per worker
Explain the East Asia's market-friendly strategies.
Many economists (World Bank) believed that a "market-friendly" nature of state's intervention contributed to the East Asian "miracle" by accelerating industrial development. According to the market-friendly approach, state intervention might be acceptable in the development process, but only if the state strictly limits its actions to foster the market mechanism (e.g. encourage competitive climate, entrepreneurs, and functioning price mechanism) and refrains from interfering with it (e.g. no price distortion). In this approach, the acceptable functions of the state are: (1) achieving macroeconomic stability; (2) investing in human and physical capital; (3) assuring a competitive internal and external environment for domestic private enterprises; (4) promoting institutional improvements; (5) protecting vulnerable social groups; and (6) defending the natural environment. This idea by the World Bank Report was highly controversial. The developmental model of Japan, South Korea and Taiwan relied on a great extent on state-owned banks and enterprises, on an industrial policy, and on a state-led policy of acquisition, adaption and diffusion of foreign technologies.
What is maturity mismatch?
Maturity mismatch happens when you borrow short-maturity loans and lend for long term. Your asset (the loan that you lend out) is not liquid. You have to wait for a long time to collect it back. However, your debt is in short term. You have to pay back debt quicker than you collect money you lend to other people. So, you borrow new loans to pay back old loans. There is a high chance that you cannot roll over short-term debts, if you keep practicing this strategy (especially if your debtors do not have money to pay you back). This is what happened to Asian banks before the crisis year. They borrow short-term loans from the U.S. and lend to domestic firms for a long-term maturity.
What is moral hazard and how was it related to the Asian Financial Crisis?
Moral hazard is an incentive to take on risky options, because the cost of failure would be borne by someone else. The moral hazard in banking happened when there is a sentiment that government will rescue banks if they fail. As a result, they will be more likely to practice risky strategy, because if they fail, someone will step in to solve problems. Remember in Asian business culture, there is a lot of relationship lending among Chaebols and Keiretsu companies. There were a lot of non-profitable loans but approved by government officials. However, banks did not worry too much because government would subsidize those loans as a part of export-promoting policies. After awhile, banks carried too much non-performing loans (bad loans - not all projects were profitable).
According to Lim's S curve how would a turle economy break away from its low-level equilibrium trap and eventually become a horse economy?
More foreign aid and Saving
Conditions in the year before the crisis in 1997 in Thailand, Indonesia, Malaysia, Phillipines, and Korea
Nonperforming bank loans ratios were high, Current account deficits were high, Domestic credit market grew fast.
According to Radelet, Sachs, and Lee (1997) which factor is positively related to economic growth
Open to international trade
Using PPPs is the alternative to using market exchange rates. The actual purchasing power of any currency is the quantity of that currency needed to buy a specified unit of a good or a basket of common goods and services. PPP is determined in each country based on its relative cost of living and inflation rates.
PPP- Purchasing power Parity
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold
Pegged exchange rate
What does it mean if a Gini coefficient is 1
Perfect inequality
IMF conditionality refers to:
Policy changes that gov. in a borrowing country has to make in order to borrow from the IMF
Dependancy ratio
Represents the economic burden of a country's working population to support children and elders
How does the export cartel work in terms of setting the price of exporting product?
See the graph. Cartel works like the monopoly. The group can maximize profit by setting quantity at MR=MC and setting price at the demand curve. The outcome of the cartel compare to the perfect competition is higher price and fewer quantities.
Who introduced the idea that income inequality first increases with economic development, then later decreases with further development
Simon Kuznets
What are the policies that gear toward sound fundamentals?
Sound fundamentals: Stable macro economy High human capital Healthy financial system Limit price distortions Open to trade Develop rural and agricultural sector It means that the country needs to get the basic right. Sound fundamental will ensure sustainable development and generate competitive climate for enhancing economic growth process
How does technology create market failure?
Technology creates positive externality. Externalities are side effects of an action that are not compensated or paid through the market's price mechanism; therefore, there is some inefficiency in allocating resources. Technology incurs high cost to develop it, but the benefits from it are shared by many people. So, the person who develops the technology pay high cost without receiving compensation from others who use the technology. For example, YouTube is starting a great way to communicate video clips. It has not made any profits yet, so we have not seen similar websites copying YouTube business idea. However, Starbuck became a big hit and afterward you see many coffee houses popped up everywhere. The first entrant develop business plan. If he fails, he bears the cost fully and no one enters the market. If he succeeds, others will enter the market and share the profits. So, in high-tech field, government may have to act like the first entrant to share the large investment fund in developing technology.
Solow Residual
The Growth rate of total factor productivity
What is the difference between GNP and GDP?
The difference between the two lies in the fact that GNP excludes income that foreigners earn in the United States.
A fixed exchange rate country experiences downward pressure on the exchange rate value of its currency. The central bank chooses to intervene in the market to maintain its fixed exchange rate. How would the central bank go about intervening? If the pressures for the currency to depreciate persist for a long period, even after successive interventions in the foreign exchange market, would it be difficult to maintain the fixed exchange rate? Why or why not? Give an example of a country that attempted to maintain their exchange rate in the face of downward pressures. What was the result?
The downward pressure means pressure on home country currency to depreciate. The central bank would have to buy domestic currency and sell foreign currency in the foreign exchange market. Since the central bank has a limited supply of foreign currency, it would be difficult to maintain the fixed exchange rate. Sooner or later the central bank would have to worry about depleting its foreign exchange reserves. An example would be Mexico in 1994. After its foreign exchange reserves were nearly gone, Mexico had to devalue its currency
Radalet, Sachs, and Lee (1997) found that
The natural resource abundant county tends to have slow economic growth
Akamatsu's flying-geese theory implied
The sequential "catching-up" experience of East Asian industrialization
Data suggests that economies of countries with different steady states will converge to:
Their own steady states
What are the limitations of using Big Mac index as the indicator for currency valuation against dollar?
Transactions costs: transportation costs, legal fees, license fees, etc. Taxes: different property taxes and sales taxes. Taste: people may like beef more in one location than the others. Labor costs: different wages and worker benefits Prices of raw materials: different prices of raw materials. For example, the price of Idaho potato increased sharply in 2008. The McDonald in China had to import New Zealand potato instead. Different inflation rates Different purchasing power of local currency. Government restrictions such as import quota and tariff.
