ECS 3200 Midterm/Final Exam FSU

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 rate

What does HPAEs stand for? Which countries were categorized as the HPAEs?

"High- Performing Asian Economies (HPAEs). They include Japan, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Thailand and Indonesia

Keiretsu

"series of affiliations"

Suppose the exchange rate between the Japanese yen and U.S dollar is 100 yen per dollar. A Japanese stereo with a price of 60,000 yen will cost _______________ .

$600

Measured in 1993 prices, real GDP in 2003 was

$9,177 billion

How HPAE governments increase saving? How about investment?

(Saving) -they keep interest rates on deposits high and stable -lower transactions costs to access banks for rural savers -limit banking competition and impose many regulations to ensure stability and solvency in the banking system -impose high taxes on luxury consumption to discourage spending -impose mandatory pension saving -government run budget surplus (Investment) -Create infrastructure that complement to private investment -create investment friendly environment

What is "Neo-Malthusian Trap"?

(circular continuous cycle) - Low income per capita - Low saving - High investment - High growth rate of output - High pop. growth rate

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) - low economic growth - low income - low saving - low investment - have to increase domestic saving (giving up current consumption to increase investment)

From the growth accounting, what factor(s) play an important role in HPAE's 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

What is the price index? How is it used to calculate the inflation rate?

- The overall price level in the economy - Uses the GDP deflator and Consumer price index

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. - 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

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.

How the HPAE governments increase 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

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. They found: 1. Found a negative relationship between y0 and gy which supports the convergence hypothesis 2. Education: weak positive link between education and economic growth 3. Natural resources abundant: strong negative link between resource richness and economic growth 4. Landlocked: negative link between being landlocked and economic growth 5. Tropics: strong negative link between being in tropics and economic growth 6. Open to international trade: strong positive link between openness and growth 7. Government saving: positive link between govt. budget surplus and economic growth 8. Quality of govt. institution: positive link between high quality of governance and economic growth 9. Population growth: negative link (confirms solow model) 10. Growth of working-age pop.: positive link 11. Life expectancy: positive link

What is land reform?

- the redistribution of property or rights in land for benefits of landless, tenant farmers

How did Asian governments promote exports?

- welcome technology transfers - open to foreign direct investment - subsidized manufactured exports - devalued currencies to support exporting sectors

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is

-200

Examples of population control policies in East Asian countries

-China - One child policy and one and a half child policy -Indonesia: emphasized fertility control -gov't distr. contraceptives through health clinics -Singapore: stop at two policy -reduce paid maternity leave

Weak fundamentals of the Asian Crisis

-Dependance on Massive Capital inflow -Chronic current account deficits -Fixed exchange rate system -weak financial sector

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 and depreciation rate. 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

What factors determine the output of the economy?

-Improved efficiency -Technological change

What is the Malthus' population growth trap?

-Large Family -High population growth -Large Labor Supply -Surplus of labor -Unemployment and under employment -Low productivity and low wages -Poverty (Circular cycle)

Who should float?

-Large economies -Closed economies -Diversified trade -Divergent inflation rates

Two main problems of traditional farming

-Low productivity -Limit access to credit market

Why do we use real GDP to compare the economic output rather than the nominal GDP?

-Nominal GDP is measured in "the current dollar value" -Real GDP is measured in "the constant dollar value." Real GDP tracks the total value produced using constant prices, isolating the effect of price changes.

Why does the birth rate decline much slower than the death rate as a country develops?

-Slowly declining birth rates following an earlier sharp decline in death rates are today characteristic of most of the less-developed regions of the world. -There is a time lag between a decline in birth and death rate. Death rate declines first in a fast pace, while the birth rate remains the same. After some period of time, the birth rate starts to slowly decline. During this lag the nation would experience a rise in population growth. Examples: Better nutrition, greater access to medical care, improved sanitation and more wide spread immunization

Who should 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 that they peg with)

Assume that the dollar value of a Swiss Franc is 0.8600 (thus 86 cents per Swiss Franc), and that Swiss importers start to like Fords (a U.S. car) more than they did in the past. Would the Swiss Franc appreciate or depreciate? Assume that the Swiss Central Bank wants to keep the Swiss Franc fixed at 0.8600. Discuss what type of foreign exchange intervention that they have to do to keep the Swiss Franc fixed?

-The Swiss Franc would depreciate, as the supply curve shifts to the right. -The Swiss Central Bank has to intervene by buying up the Swiss Franc and selling its reserves of dollars.

Three main factors of the Asian Financial Crisis

-Weak fundamentals -External Shock -Panic

Initial conditions in the year before the crisis in Thailand, Indonesia, Malaysia, the Philippines and Korea 1997 indicate that:

-nonperforming bank loan ratios were high -current account deficits were high -domestic credit markets grew fast

What are the policies that gear toward sound fundamentals?

-stable macro economy -high human capital -healthy financial system -limit price distortions -open to trade -develop rural and agricultural sectors 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.

Which of the following are likely to lead to international finance crises?

-waves of overlending and overborrowing -exogenous international shocks -exchange rate risk and large international short-term lending

What are three patterns of Flying Geese formation? Explain.

1. Product-life cycle 2. Inter-industry sequencing 3. Inter-regional catching up

According to the World Bank, what are the common characteristics between the HPAEs? Briefly explain each.

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

How did Lim classify Asian economies? What are the characteristics of each country group?

1. Turtle Economies - low level of income - low output growth rate - small, poor, stagnant 2. Horse Economies - middle income level - high output growth rate - lean and fast 3. Elephant economies - high income level - low output growth rate - large and slow

According to Radelet, Sachs and Lee (1997), how would manufactured exports promote economic growth in East Asia?

1. allows countries to use their comparative advantage in labor-intensive operations 2. A manufactured export fosters technological progress 3. Foreign earnings from manufacturers exports pay for imported capital goods 4. Success in exporting has spillover effects on the other sectors

According to the current statistics, Vietnam's GDP is 100 billions, imports are 60 billions, and exports are 75 billions. To measure the degree of trade liberalization, the openness equals to

1.35

You buy 100 shares of IBM stock at $100 per share and pay $150 commission. How much will the transaction add to GDP?

150

What would be the implied Purchasing Power Parity exchange rate of Japanese yen (theoretical exchange rate) from this Big Mac index?

1USD=80 Yen

Suppose that a country exports $100 million of goods and services and imports $75 million of goods and services, what is the value of net exports?

25 million

A 2 percent growth rate will bring about a doubling of real GDP in about how many years?

35 years

If the consumer price index (CPI) was 120 at year-end 2004 and 126 at year end 2005, inflation during 2005 was approximately?

5%

If a countries population (age 16 and over) is 50 million with 2 million unemployed and 28 million currently holding jobs, the unemployment rate is

6.7 percent and the labor force participation rate is 60 percent

.Use the growth accounting to answer this question. From 1970 to 1989 Singapore's output growth rate averaged 8.4 percent per year. A recent growth accounting study showed that the Solow residual accounted for only 1.2 percent per year of Singapore's output growth. This growth-accounting analysis used weights of 0.33 for labor share and 0.67 for capital share of national income. If Singapore's labor force grew by 2.6 percent per year during this period, what will be the annual growth rate of Singapore's capital stock?

9.5%

Which of the following would increase GDP of the United States?

A Frenchman buys a case of wine from a winery in California

Roger lives in Iceland and purchases a snowmobile manufactured in the United States. This purchase is

A U.S export and an Icelandic import

Which one of the following persons would be considered unemployed?

A construction worker who was laid off due to cold weather

Fixed or Pegged Exchange Rate

A country's exchange fluctuates in a narrow band against some base currency over a sustained period (>1 year)

A chaebol refers to:

A large business conglomerate, typically owned by a single family, operated wit substantial government assistance

What is life expectancy?

A measure of the overall quality of life in a country and summarizes the morality at all ages. The average period that a person may expect to live.

Target bands

A method that was seen as combining the good aspects of the peg and floating was the target bands. these rates were allowed to vary within fficially set bands. When the bands limits were reached, the central bank would intervene to push the rate back within the bands again

Why do we used purchasing power parity adjusted real GDP per capita to compare across different countries? What problems with real GDP per capita in US $ measure that led to the introduction of PPP adjusted

A nation's GDP adjusted for purchasing power parity (PPP) is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. - Things are much cheaper in developing countries and things are much more expensive in established nations Other countries vary in the value of their money so it needs to be adjusted

What is an economy's production function?

A production function relates physical output of a production process to physical inputs or factors of production. - 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 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 a tariff?

A tax on imports. this method gives domestic producers an advantage over foreign producers because domestically produced units are not "taxed"

What is rule of 70?

A variable that grows at a constant rate of :x% per period" will double in value approximately "70/X periods"

What is the global poverty line? Why poverty matters? What does being poor mean?

Absolute poverty= $1.25/day. In the past two decades, the number of people living below the $1.25 and $2.0 poverty line has fallen. ... ...

Why does the population growth rise at the initial stage of development?

Although the value of r is affected by both birth rate and death rate, the recent history of the human population has been affected more by declines in death rates than by increases in birth rates. There is a time lag between the decline of death rate and birth rate. Thus, the population growth tends to rise during this time lag.

What is the total factor productivity?

Amount of output that can be achieved with a given amount of factor input. It measures how efficient resources are being used.

According to the World Bank Report (1993), which of the following characteristics was NOT observed in the High performing Asian Economies from 1960-1990?

An increase in income equality

appreciation

An increase in the value of a currency as measured by the amount of foreign currency it can buy (strengthens)

An increase in capital is called

An investment or capital formation

If the dollar price of one South Korean won goes from $2.50 to $1.50, the dollar has _____________ and South Korean people will find U.S products become _____________ .

Appreciated; more expensive

According to "The Asian Financial Crisis Ten Years Later" which of the following factors does not belong to the "three vulnerabilities" that caused the Asian Crisis?

Appreciation of the value of Japanese Yen

Explain changes in the rate of natural increase as a country goes through demographic transition

As society becomes richer, the death rate falls. The decline in the death rate tends to precede the birth rate.

What does ASEAN stand for? Which countries are ASEAN?

Association of Southeast Asian Nations -Malaysia, Thailand and Indonesia

From the video "Secrets Behind Korea's Economic Success" in the Assignment 2, which of the following industries becomes a successful industry in South Korea?

Automobile

Using the Lorenz curve illustrated above, the Gini coefficient is defined as the following ratio of areas?

B/(B+C)

Figure 1 represents the market for Thailand's currency. Suppose that the initial equilibrium exchange rate of baht was E1, where S1 crossed D1. Then assume that foreign investors lose confidence in Thai economy and thus dump-sell their baht-denominated assets in Thailand. If Thailand's central bank wants to peg the exchange rate at its initial level E1,

Baht will be overvalued and there will be a surplus of baht by the amount CE

Which country has the most expensive big mac?

Brazil

Figure 1 represents the market for Thailand's currency. Suppose that the initial equilibrium exchange rate of baht was E1, where S1 crossed D1. Then assume that foreign investors lose confidence in Thai economy and thus dump-sell their baht-denominated assets in Thailand. If Thailand's central bank wants to peg the exchange rate at its initial level E1, the central bank will have to

Buy baht and buy dollar

Use the growth accounting to answer this question. From 1970 to 1989 Singapore's output growth rate averaged 8.4 percent per year. A recent growth accounting study showed that the Solow residual accounted for only 1.2 percent per year of Singapore's output growth. This growth-accounting analysis used weights of 0.33 for labor share and 0.67 for capital share of national income. Singapore's labor force grew by 2.6 percent per year during this period, which of the following is TRUE?

Capital accumulation is responsible for 76% of Singapore's output growth

In the Solow model, what will happen to the change in capital stock, if new investment exceeds the depreciation of existing capital?

Capital stock per capita will increase

Thailand, Indonesia, and Malaysia produce 90% of the worlds natural rubber. They have organized the International Rubber Consortium Limited to coordinate their supply and exporting decisions to maximize joint profits. This type of organization is called a

Cartel

How does the export cartel work in terms of setting the price of exporting product?

Cartel works like a 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

What is the capital accumulation equation?

Change in capital stock = Investment (i) - depreciation (dk)

Asian tigers or newly industrializing countries of East and Southeast Asia include the following except

China

Which of the following countries was not one of those severely hit by the East Asian financial crisis in 1997?

China

Saving- investment identity: closed vs. open economy

Closed Economy 1. GDP=C+ I+G 2. GDP=C+S+T 3. I+G=S+T 4. I=S+(T-G) Investment = Private Savings + Public Saving Open Economy 1. GDP=C+ I+G+(X-M) 2. GDP=C+S+T 3. I+G+(X-M)=S+T 4. I=S+(T-G)+(M-X) C = consumption I = investment G = government spending S = private savings T = taxes X = exports M = imports KI = capital inflows from abroad

Which of the following statements is NOT true about the HPAE's human capital formation during the 1990's?

Comparing to the Latin American countries, the HPAE's governments allocated more of their educational budgets to higher rater than basic education

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

In economics, what do we mean by saving? What does investment mean?

Consuming less out of a given amount of resources in the 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 is the purchase of goods that are not consumed today but are used in the future to create wealth

Suppose that Vietnamese 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 following industrialization problems does Vietnam face?

Coordination failure

Which of the following exchange rate systems is the least flexible?

Currency board

If a used car dealer purchases a used car for $3,000, refurbishes it, and sells it for $8,000, the...

Dealer contributes value added equal to $5,000 and consequently $5,000 is added to GDP

In the Solow model, how does the rate of population growth affect the steady-state growth rate of output per capita?

Declines

In the Solow model, how does the rate of population growth affect the steady- state level of output per capita?

Decrease in level of output per capita

A increase in the rate of population growth n will

Decrease the steady state level of capital per worker

What are the drawbacks of using GDP per capita as the well being measurement?

Doesn't truly account for production in the service sector. Also doesn't account for jobs done in the home, illegal and underground production.

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.

Which of the following conclusions is true about Krugman's (1994) debate on Asia's miracle

Economic growth in Asian economies will slow down, since they run into diminishing returns of capital investment

The current rapid growth of income- per- worker in China could be due to

Either a rise in productivity or a fall in labor force growth rate

Which of the following is the central feature of he Bretton Woods System?

Every country fixed its exchange rate to U.S dollar

. Referring to Figure 2, the imposition of a tariff on shoes caused economic welfare in the U.S. to __________ by an amount measured by area __________. {Hint: this question asks for the area for the deadweight loss}

Fall; (b+d)

Other things equal, relatively poor countries tend to grow

Faster than relatively rich countries, this is called the convergence effect

Peg:

Fixed rate chosen by the government / Central Bank

currency board (peg):

Fixed rate with 100% foreign reserves in central bank A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate,

Net capital outflow refers to the purchase of

Foreign assets by domestic residents minus the purchase of domestic assets by foreign residents

Two price indices are considered in this class: CPI and the GDP deflator. Explain the differences between the two measures of the price level.

GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. GDP Deflator = Nominal GDP/ Real GDP X 100. CPI is a measure of the overall cost of the goods and services bought by a typical consumer.

Lim's S curve classifies the Asian economies into 3 groups by comparing countries'

GDP per capita and growth rate of GDP per capita

What is the difference between GDP and GNP?

GNP is the total income earned by a nations permanent residents. GNP - Factor Payments from abroad + Factor payments to abroad = GDP.

Referring to Figure 2, the impact of a tariff on shoes on the amount of domestic producer surplus is a __________ measured by area __________.

Gain; a

Which of the following is NOT correct about the Asian- style capitalism?

Government has ownership in all manufacturing firms

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 shortage pressure and bring prices downward.

Which of the following characteristics does NOT belong to the elephant group?

High investment

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 - opposite of high

Which country in the HPAEs has the highest degree of economic freedom?

Hong Kong

Which country in the HPAEs has the highest degree of trade liberalization?

Hong Kong

Which countries in HPAEs adopted currency board? Which ones adopted free floating?

Hong Kong = Currency Float Free Float = Japan and South Korea The rest of the HPAEs managed to float

Which countries are Asian Tigers?

Hong Kong, Taiwan, South Korea and Singapore

What does it imply when a country has low life expectancy and high infant mortality rate?

If it has high infant mortality that is a red flag for the level of health in the country and low life expectancy could mean that the people are not going to be living a very long life

According to Akamatsu's flying geese (FG) hypothesis, which of the following development pattern represents the product- life cycle pattern of FG formation?

Import --> Import substitution --> export

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

Briefly explain the Kuznets inverted U- shaped curve

Inequality might first increase as a nation makes transition from agricultural economy to an industrial economy. As the economy continues to develop, the income inequality declines

What is the Green Revolution?

International effort to develop high-yielding varieties of rice

An automobile manufacturing plant open in Indiana, and its owner, all of the workers and all raw materials are from Japan. How would your purchase of an automobile from this plant change domestic GDP and GNP?

It would increase GDP and leave GNP unchanged

Which country in the HPAEs has the highest average levels of education?

Japan

Which country in the HPAEs has the highest income per capita?

Japan

Which of the following transactions would be included in this years GDP?

Johnson rents a five year old house from Smith

In the Slow model of an economy with population growth but no technological change, at the steady state, the level of new investment must

Keep up with the depreciation of existing capital, provide capital for new workers, and keep the level of capital per worker constant

Which of the following is "chaebol"?

LG group

The Solo growth model predicts that countries with higher population growth rates will have

Lower steady state level of output per worker

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 is 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 a while, banks carried too much non-performing loans (bad loans - not all projects were profitable).

Which of the following is true (using the open economy saving-investment identity)?

NCO = NX

From the video "Secrets behind Korea's Economic Success" in the assignment 2, a ___________________ is a rural development program in which villages were given cements to build whatever they want. Only villages that demonstrated success were then granted additional resources and more cements. The government would support only the communities that could stand alone and have potential for development

New community movement

John has been without a job for 12 months and quit searching for work about three months ago. The Bureau of Labor Statistics would classify John as

Not part of the labor force

According to the empirical research by Radelet, Sachs and Lee (1997), which of the following factors is positively related to economic growth?

Open to international trade

How do we compute a countries openness? What does it imply?

Openness is used to measure 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. High openness indicates that the country tends to rely more on international trade. Openness = (X+M)/GDP

What is Solow residual?

Or "technological progress" or "The growth in Total Factor Productivity (TFP)" - the measure of the efficiency, technology, and other influences on productivity

Using the above information about the crude birth and death rates, which of the following statement is correct

Philippines' rate of population growth is 2.1 percent

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 are negatively related to economic growth?

Positive: 1. Openness and manufactured exports 2. Higher saving and investment 3. Strong macroeconomic management Negative: 1. Longer life expectancy 2. Low education levels

Which of the following would be most appropriate for the measurement of differences in the average standard of living of people at different points in time?

Real GDP per capita

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 1,000). Birth rate (b) − death rate (d) = rate of natural increase (r)

If the Gini coefficient for U.S income is .41 and the Gini coefficient for Swedish income is .25, then which country has the least unequal distribution of income?

Sweden

In the Solow model with technological progress, persistently rising living standards can only be explained by

Technological progress

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 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. = (Area A)/ (Area A + Area B).

What does it mean if Gini coefficient is 1. How about 0? 0.5?

The Gini coefficient is a number between 0 and 1. The higher the number is, the more income being unequally distributed among people in the country.

What is the relationship between the IMF and the SDR?

The International Monetary Fund issued the Special Drawing Rights in 1969 to support the Bretton Wood System. The IMF was afraid that there would not be enough gold to support the expansion of international trade. After the fall of the Bretton Wood System, the role of the SDR has changed to become international reserves and to settle international accounts.

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. The 45° line shows what the Lorenz curve would look like if there were perfect equality (the line of perfect equality); it is a useful reference because the distance between the Lorenz curve and 45° line is a measure of inequality:

What is a Special Drawing Right? (SDR)

The SDR is an artificial "basket" currency used by the IMF (International Monetary fund) for internal accounting purposes -used to solve the liquidity problem

In a steady state with no population growth and no technological progress,

The amount of capital per worker remains constant over time, investment per worker equals depreciation per worker, and saving per worker equal depreciation per worker

The purchasing power parity method of comparing income across countries is based on

The cost of purchasing a specific bundle of goods and services in each country

Which of the following cases represent an appreciation of the exchange rate value of the U.S dollar?

The exchange rate goes from 100 yen/$ to 111 yen/$

What is the difference between the gld standard of 1880-1914 and the Bretton Woods System of 1944-1973?

The gold standard was a fixed exchange rate system where each monetary unit was based on a given amount of gold. such a gold amount was exchanged by anyone that asked for the gold from a bank. Thus, individuals could obtain gold in exchange for dollars during the the gold standard. In contrast the Bretton Woods system had the dollar based on gold, but only for other central banks to obtain. Currencies were no longer exchangeable for gold, but only the anchor currency had a gold value and only for other central banks. Other currencies were pegged to the dollar, but those pegs could be adjusted if the peg resulted in persistent trading problems.

What credit-market policy did the Korean government use to promote exports during the 1970s?

The government used low-interest-rate loans as a form of indirect subsidy to exporters

Suppose that a country in a steady state implements policies to increase its savings rate. After the new steady state is reached...

The level of output per worker will be higher than before

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. The market value, final goods and services, produced within a country, during a given time period are counted toward GDP. Financial transactions and money transfers are not counted toward GDP.

Which of the following is true about the natural resource curse?

The natural resource rich country tends to have slow economic growth

With no population growth and no technological progress, the steady state level of capital per worker will increase whenever

The savings rate increases

What does Akamatsu's flying geese hypothesis imply?

The sequential "catching up" experience of East Asian industrialization

How unemployment rate is measured and how the unemployment rate is calculated

The unemployment rare is the percentage of the labor force that is unemployed. It is (Number of unemployed / Labor Force) x 100. Unemployment is measured 1. The bureau of Labor Statistics surveys 60,000 households every month. The BLS places each adult (16 or older) into one of three categories: employed, unemployed or not in the labor force.

Suppose the average price of a Big Mac in the United States is $3.50, which in Japan, the average price is 400 yen. If the price of a dollar is 100 yen per dollar, the purchasing power parity model of exchange rate determination suggests

The yen is overvalued

International date suggests that economies of countries with different steady states will converge to

Their own steady states

Who are discouraged workers? How do they affect the true level of unemployment?

They are people who have been out of work for a long time and giving up in looking for a job. They are counted as "not in the labor force" as a result, they he will no longer appear in the statistics computed in the chart.

What did the World Bank conclude about the TFP growth in the HPAEs?

They grouped HPAEs into two groups: 1. Investment- driven economies: Indonesia, Malaysia, Singapore 2. Productivity- driven economies: Taiwan, Hong Kong, South Korea and Thailand

How has the pattern of exports changed in East Asia since 1960s?

They have slowly progressed to manufacture everything up to high - tech manufactured exports

What has HPAEs done differently in human capital formation comparing with the Latin American Countries?

They made efforts to expand their primary and secondary education levels. Latin America has focused on higher education

Which of the following will shift the demand curve for the Japanese Yen to the right?

U.S demand for products imported from Japan increases significantly as Japanese culture becomes more popular in the U.S

In the Solow model, how does the saving rate affect the steady- state growth rate of output per capita?

Will result in temporary growth

Which of the following factors caused a decline in birth rate in developing countries during 1960-1995?

Women enter the labor force, an increase in female education and contraceptives and family planning programs

How does technological progress affect the steady- state growth rate of output per worker?

Would increase

How does technological progress affect the steady- state level of output per worker and the level of capital per worker over time?

Would increase both of these factors

What is a trade surplus? What is a trade deficit?

X= goods and services produced at home and sell abroad M= goods and services produced abroad and purchased at home Trade deficit= NX < 0 (or X < M) Trade Surplus= NX > 0 (or X >M)

Would high saving and investment lead to economic growth? If so, is this growth rate sustainable?

Yes, it would not be sustainable at a certain point they will experience diminishing returns

Floating (Flexible) exchange rate

a country's exchange rate fluctuates in a wide range, gov't makes no attempt to fix it against any other base currency.

depreciation

a decrease in the value of a currency as measured by the amount of foreign currency it can buy (weakens)

vertical keiretsu

a system that benefits a single manufacturer Ex: Toyota

Dollarization (peg)

adopt someone else's currency -strongest form of peg

What is the economic growth?

an increase in the amount of goods and services produced per head of the population over a period of time. Depends on 1. Factor Accumulation (increase in capital stock (k) ) 2. Productivity Growth (increase in the amount of output produced by a given number of machines or workers)

Industrial Policy

any type of selective interventions that attempt to alter the structure of production toward sectors that are expected to offer better prospect for economic growth

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. -1. A nation finds ample natural resource reserves 2. Economic focus begins to target this high-income industry 3. Skilled workers from other sectors transfer to the resource sector 4. Higher wages make the national currency less competitive 5. Other industries, especially the manufacturing sector, begin to suffer

If the domestic currency is initially undervalued, that is below par, the central bank must intervene to sell the ______ currency by purchasing ________ assets

domestic; foreign

Import Substitution refers to:

government policies which aim at replacing imports of foreign products with domestic production of the same goods

small country

if a country does not substantially affect the world price for the good, then it is a small country. EX: Malaysia

If there are diminishing returns to capital,

increases in the capital stock increase output by even smaller amounts

In the steady state of Solow growth model, an increase in the savings rate

increases output per worker and increases capital per worker

An advantage of adopting floating exchange rate systems is that

it prevents against currency speculation and currency crisis

Suppose that Poland undertakes policy to increase its saving rate. This policy will likely

lead to higher GDP growth during a transitional period

Referring to Figure 2, the impact of a tariff on shoes on the amount of domestic consumer surplus is a __________ measured by area __________.

loss; (a+b+c+d)

IMF conditionally refers to:

policy changes that government in a borrowing country has to make in order to borrow from IMF

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must

purchase domestic currency, meaning that it loses international reserves

Suppose that Thai government commits to maintain stable price of rice. If severe drought has decreased the supply of rice, the price of rice would ________. In order to keep the price at its original level, the government could _________.

rise; sell rice from the buffer stock to meet excess demand for rice.

In the Solow growth model with population growth n, the change in capital per worker is equal to

sy- (d +n) k

The consumer price index is designed to measure the extent to which

the cost of a typical bundle (market basket) of consumer goods has changed over time

If the French demand for American Exports rises, then

the dollar should appreciate relative to the euro

foreign exchange rate

the financial market where exchange rates are determined. this foreign exchange market is mostly comprising large commercial banks buying and selling foreign exchange from and to each other. cash transactions are a very small part of the total market. mostly the market comprises transactions on paper that are done between banks and large industrial companies.

The GDP deflator is designed to adjust nominal GDP for changes in

the general level of prices over time

Cash Subsidy

the governement may pay cash to the produced for each exported item

Cost subsidy

the producer might benefit from a tax break, or low interest loans. Furthermore, the govt. might subsidize the R&D or labor cost. Either one of these would be considered cost subsidies

horizontal keiretsu

usually centered around banks. the main benefit f this system is that it can eliminate financial markers and market risk

Assuming a closed economy, the above figure displays the critical equations of the Solow growth model for an economy with no population growth and no technological progress. The vertical distance CD represents

∆k is positive