Economics Final

What is the current World Bank threshold for absolute poverty?

$1.90

What are four benefits of trade?

- Comparative Advantage - Factor-price equalization - Technology transfer - More peaceful relations among countries

What are four economic factors that relate to environmental quality?

- Democracy - Income inequality - ENGOs - Trade and globalization (mixed evidence)

What are some key recommendations of the Sarkozy commission?

- Distinguish between current well-being and sustainability - Better measurement of GDP - including quality assessment for private as well as public services - Shift of focus from production to income and wealth - Give more prominence to distribution of income, consumption and wealth - Include non-market activities -Measuring sustainability using a dashboard of indicators - Whether it makes sense to aggregate different measures into one

What are the four key environmental challenges outlined in this class?

- Global population growth - Non-renewable resources - Renewable resources - Pollution and waste

What are fundamental capabilities?

- Human capital (e.g., education, health) and institutions (e.g., good governance, regulatory frameworks). - As fundamental capabilities are multi-dimensional and complementary, a broad range of investments (in skills, education, administrative capacity and governance) are needed over a long period of time.

What are four potential drawbacks of privatization?

- Market failure (externalities, monopolies) - Reduced ability to meet social objectives. - Excessive interest group political influence. - Inequality.

How do the poor spend their money?

- Purchase of food: (56-78% of income) Even those living on less than $1 per day don't spend everything on food. And, they don't always buy the cheapest food to meet caloric needs (taste, culture, preferences matter). -Other purchases: alcohol and tobacco, festivals (funerals, weddings etc.), and on assets (TV, radio etc.) - Usually have very low ownership of assets - Low spending on healthcare (more likely to be sick) and on education (only about 2%)

What are four potential benefits of privatization?

- State revenues (sale of SOEs) - Higher productivity; Innovation - Allocative efficiency - Reduces ability to pursue political objectives

What are two key issues with the Kuznets curve, according to Kuznets?

- U-curve ... based on "perhaps 5% empirical information and 95% speculation, some of it possibly tainted by wishful thinking.". -No adequate empirical evidence is available for checking this conjecture.

What are five drawbacks of free trade?

- Vulnerability and lock-in - It matters what products a country specializes in. - Environmental impacts. - Inequality. - Social and human rights.

What are three 21st century findings about the Kuznets curve hypothesis?

-Continued uncertainty surrounding the U-curve - That there could be political and contextual reasons for why specific countries may have an inverted U-curve -Some time series data on advanced countries - confirms Kuznets hypothesis

What are some ways that the poor earn their money?

-Entrepreneurship and multiple occupations among the poor (many do some agricultural work and operate some form of non-agricultural business) -Self-employment in small businesses with low assets (usually just including family members) is usually large fraction of the employed - Temporary migration: usually to urban centers (permanent migration is less common) - Lack of specialization: due to multiple low-income jobs

Why do we measure poverty by food?

-Food is a basic necessity -Large part of the spending by poor is on food -Providing food seems more humane than providing other consumption goods; attractive for development programs & more political support

What are some modern (80s and 90s) criticisms of the Kuznets curve?

-Growth does not solve problems of inequality and poverty! -Inequality is often a factor in political disasters (civil wars in Africa and military dictatorship in Latin America) -World Bank: Possible to achieve both growth and equality -Criticism on the use of cross sectional data. Need time-series analysis to confirm the pattern of change

What are six things that are essential for trade?

-Infrastructure -Peace and security -Macroeconomic stability -Property rights -Contracts that can be enforced in the court of law -Trust between trading partners

What are five key traits of GSIs?

-Market-based, export-oriented policies -Well-functioning legal system -Private ownership to encourage investment -Stock markets that promote effective management -Stable financial system, flexible labor markets

What are two explanations for the initial rise in inequality, according to the Kuznets curve?

-Movement to urban increases weight of urban sector (which is more unequal than rural sector) -If income gap between urban and rural sector widens, because urban sector is more productive than rural, inequality rises.

What do we miss if we only look at GDP per capita?

-Production could be increasing, while income at the median level is declining or inequality is increasing -Change in quality of services -The value of public goods -GDP sometimes increases with things you want to have less of (defensive expenditures) -Household production is neglected -Many of the aspects central to well-being - quality of leisure, work life balance, free services are not counted -Quality of environment is not accounted for -Does not consider issues associated with inequality and stability -Aspects such as health care, education, political participation are not included

What are two explanations for the eventual fall in inequality based on the Kuznets curve?

-Rise in income share of the lower income groups in non-agricultural sector over time -Institutional and political changes in growing and free economic society

What are three reasons that the poor are more likely to be affected by climate change?

-They are ill-prepared to deal with it and could go deeper into poverty if hit by an environmental disaster. - They are more dependent on natural resources for their livelihood (most are involved in agriculture) - Poor countries also have limited institutional and financial capacity to respond to climate change

Gini coefficient ranges from...

0 = absolute equality 1 = absolute inequality (sometimes 100)

What are the three elements of good institutions?

1) enforcement of property rights for broad sections of society (to incentivize investment and entrepreneurship) 2) constraints on actions of the powerful groups so these people cannot expropriate incomes and investment of others 3) some degree of equal opportunities for broad segment of society so that they can invest in human capital and participate in productive activities

What are four issues with the following argument? Economic freedom, and its impact on development, is context dependent. Countries have developed with limited freedoms.

1)What is the freest market? Think of free financial market, free labor market, maximum business freedom. Is this always good for development? 2)Short term restrictions on business may be good for their long-term performance 3)Firm-level "optimal" choices may not be socially optimal (e.g., pollution externalities, work/life balance). 4)Does higher efficiency promote growth? No clear evidence!

What are two key issues with the free trade theory?

1.When assessing if free trade is beneficial, we are only looking at the cost of production. This could be different from "social costs". 2.Free trade is primarily a story about redistribution, rather than about net efficiency gains!!!

What happened at the Paris Agreement?

200 nations agreed that it was necessary to limit global warming to well below 2 degrees Celsius and to pursue efforts to limit the warming to 1.5 degrees Celsius.

What is a gini coefficient calculated as?

A / (A+B)

What is a gini coefficient calculation based on?

A Lorenz curve

What is a closed economy?

An economy with little or no international trade (A country's economy is referred to as "closed" if it exports and imports small amounts relative to its GDP. )

What is the Better Life Index?

BLI combines a large number of dimensions, into one single indicator using different possible weights.

How can comparative advantage be gained?

Comparative advantage can be gained through climate, resource endowment, and sometimes through policy interventions (such as investment in human or manufacturing capital).

What is the background on the Kuznets curve hypothesis?

Developed by Simon Kuznets in the 1950s based on data from the UK, US, and Germany.

What is a foreign trade zone?

FTZ's are sites within the US or near the US customs port of entry where foreign and domestic goods are held without time limit until they are ready to be released into international commerce. (a designated area of a country within which foreign-owned manufacturers can operate free of many taxes, tariffs, and regulations )

What are international trade flows?

Flows of goods and services

What energy supply is 81% of the world still reliant on?

Fossil fuels

What is the most common measure of economic inequality?

Gini coefficient

What does GSI stand for?

Global Standard Institutions

Why is the question of measurement important?

If our metrics are flawed, so may be the inferences that we draw to make policy decisions.

What is the Human Development Index?

Indicator of development for each country, constructed by the UN.

What have the most reliable levers of rapid and sustained growth been?

Industrialization and manufactured exports

What is the dominant theory on markets and institutions?

Institutions that maximize market freedom and most strongly protect private property rights are the best for economic development.

Poverty causes: geography hypothesis

It is the forces of nature that primarily determine poverty levels

List at least two Millennium Development Goals that were met. List at least two that weren't met.

MDGs met ●Extreme poverty fallen to a third of what it was in 1990. ●Decline in those living on less than $1.90 per day from 26.9% to 9.2% ●Decline in maternal mortality by 37% since 2000, under 5 mortality dropped by 47 percent ●Decline in HIV incidence ●Access to electricity in LDCs has more than double ●Global labor productivity increased, and unemployment decreased ●More than 100 countries have adopted sustainable consumption and production initiatives ●93% of the world's 250 largest companies are now reporting on sustainability

What do we mean when we say international flows of people?

Migration

Poverty causes: institutions hypothesis

Poverty is determined by man-made influences (institutions). Some societies have better institutions than others.

What is the standard definition of economics?

Social science that studies the production, distribution, and consumption of goods and services.

What do we mean when we say ecological modernization?

South becomes more like North - Income growth demanding better environmental quality -FDI - with foreign firms having superior technology & stricter environmental regulations - International agreements - Governance from civil society

What do we mean when we say environmental imperialism?

South becomes more like North (jute vs. polypropylene, U.S. maize displacing Mexican maize)

What is Adam Smith's trade theory?

Specialization increases efficiency and the extent of specialization achieved in a society would be governed by the size of the market. Advocated for free market and unfettered trade among countries.

What are tariffs?

Taxes on imported goods

Is a pro-trade or anti-trade view too simplistic? Why or why not?

The "pro-trade" or "anti-trade" view is too simplistic. Need to assess the advantages and disadvantages of trade to see how it affects any country. (Trade has become a fact of modern life. The focus should be on how to structure trade so as to enhance well-being and make trade efficient, fair, environmentally sustainable and respectful of human rights.)

What is OUR definition of economics?

The study of how people manage their resources to meet their needs and enhance their well-being.

What is conditional convergence?

Those countries with human capital, investment, institutional quality, exposure to trade, and macroeconomic stability show high growth rates.

How do we define 'employed?'

Those who did any work or had jobs as paid employees or business owners, or worked for 15 hours or more at a family business (only includes civilian noninstitutional population 16 years or older)

What is maximum efficiency?

To be able to produce the maximum amount of output from a given amount of input

What is the Kuznets Curve?

a formula showing that inequality increases during the early stages of capitalist development, then declines, and eventually stabilizes at a relatively low level

What is a trade ban?

a law preventing the import or export of goods or services

What is subjective well-being?

a measure of welfare based on survey questions asking people about their own degree of life satisfaction

What is administrative capitalism?

a national system characterized by private corporate ownership and a substantial reliance on public administration as a mode of coordination

What is administrative socialism?

a national system in which state ownership predominates and activity is coordinated primarily by public administration (command)

What is market socialism?

a national system in which state ownership predominates but much economic activity is coordinated through markets

What is laissez-faire capitalism?

a policy of minimum governmental interference in the economic affairs of individuals and society.

What is a trade quota?

a restriction on the quantity of a good that can be imported

What is an open economy?

an economy that trades goods and services with other countries (A country's economy is referred to as "open" if it exports and imports large amounts relative to its GDP.)

How do we determine the poverty line?

based on the standard of living (usually determined by consumption level, esp. food)

How does financialization affect inequality?

benefits mostly accrue to the rich, especially in early stages of development

What are international income flows?

capital and labor incomes or transfer payments

How does demography affect inequality?

changing age structure, marriage patterns

How does a decline in labor market institutions affect inequality?

decline in unions, more rigid hiring and firing conditions

How do tax policies affect inequality?

declining progressivity of tax systems, reliance on cash transfer programs

What are some dimensions of the Better Life Index?

environmental quality, income inequality, housing conditions, jobs and earnings, health status, work and life balance, education and skills, education and skills, social connections, civic engagement, personal security, subjective well-being

What is free trade?

exchange in international markets that is not regulated or restricted by government actions

What is the headcount ratio?

fraction of population in poverty HCR = (Number of people below poverty line)/(Total population)

What was the goal of the Sarkozy Commission?

identify the limits of GDP as an indicator of economic and social progress, and consider what additional information might be required to better assess social progress

What is the environmental Kuznets Curve hypothesis?

in the early stages of economic development environmental degradation will increase until a certain level of income is reached, and then environmental improvement will occur.

How does technology effect inequality?

increased productivity & income but also loss of jobs, income growth only for those with higher skills

What is climate change?

long term changes in global climate, including warmer temperatures, changing precipitation patterns, more extreme weather events, & rising sea levels.

What are discouraged workers?

marginally attached workers who have given up looking for jobs because they believe there are no jobs for them

What is absolute poverty?

not having enough to eat, or not enjoying good health; define certain level as being absolutely poor. Useful for making global comparisons and for measuring poverty over time

What are trade related subsidies?

payments given by governments to producers to encourage more production, either for export or as a substitute for imports (esp. for infant industry)

What are marginally attached workers?

people who want employment and have looked for jobs in the past 12 months but not in the past 4 weeks.

What is relative poverty?

poverty lines move with average income, so that the minimum acceptable income is tied to what other people get (distance from the mean)

What are migration restrictions?

restrictions on the flow of people into and out of a country

What are capital controls?

restrictions or taxes on transactions in financial assets such as currency, stocks, or bonds, or on foreign ownership of domestic assets such as buisness or land

What is comparative advantage?

the ability to produce a good at a lower opportunity cost than another producer

What is absolute advantage?

the ability to produce something at lower per-unit costs than one's competitors

What is plotted on a Lorenz curve?

the cumulative percent of households on the x-axis, arranged from poorest to richest. The y-axis shows the cumulative percent of income received by a given percentile of households.

What does the Lorenz curve show?

the degree of income inequality

What is the Kuznets Curve hypothesis?

the hypothesis is that income inequality increases during the initial stages of economic development, but falls during later stages of development (i.e., an "inverted-U" over time with development).

What are capabilities?

the opportunities that people have to be well-nourished, decently housed, have access to education, and in many other ways live lives that they find worthwhile

What is the poverty gap ratio?

the ratio of the average income (or consumption) needed to get all the poor people to the poverty line, divided by the mean income (or consumption) of the society. So poverty gap is not a measure of poverty, but of the resources required to eradicate poverty.

What is protectionism?

the theory or practice of shielding a country's domestic industries from foreign competition by taxing imports.

How do we define 'unemployed?'

those in the civilian non-institutional population, who were not employed during the reference week but were available to work and had made specific efforts to find employment sometime in the 4 week period ending with the reference week.

What is GDP?

total market value of final goods and services produced by an economy over a period of time (usually one year)

How do globalization and trade affect inequality?

trade has promoted competition, brought jobs to low income countries (could have lowered inequality in developing countries). But it has caused job losses in developed countries

What is the theory of comparative advantage?

trading partners can both benefit when they specialize in the goods that they can produce at lower opportunity cost.

What is factor-price equalization?

when wages become more similar across countries as trade increases (Free trade should tend to equalize the prices of different production inputs across countries (and thus reduce inequality across countries))

What are nationally determined contributions (NDCs)?

where each country is free to set its own emissions targets. There are no penalties for not meeting the target and the countries meet every 5 years to reevaluate their NDCs