ECS 3200 Test 1

. How HPAE governments increase saving? How about investment?

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.

What is the rate of natural increase?

(RNI) is the crude birth rate minus the crude death rate of a population

what are selective intervention policies

. Export push (promote exporting manufacturers) . Financial repression (set interest rate slightly below equilibrium rate to promote borrowing) . Direct lending (government indirect subsidized loans with low interest rate to selected industries) . Selective promotion (promote "target" industries)

What are policies that gear toward sound fundamentals?

. stable macro economy . high human capital . healthy financial system . limit price distortion . open to trade . develop rural and agriculture sectors

Why is cooperation between business and governments important in East Asia?

.to solve scale economies problems .to solve externalities .

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

0= complete equality 1= complete inequality .5= half inequality

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

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

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, and stagnant Ex. North Korea, Mongolia, Malawi, Rwanda, Peru (growth rate <1.5%) 2. Horse economies Middle income level High output growth rate Lean and fast Ex. China, Thailand, Indonesia, Malaysia, Vietnam 3. Elephant economies High income level Low output growth rate Large and slow Ex. Japan, the U.S., and the Western European countries

Explain the market-friendly view of HPAEs' role of government on economic growth. What are the suggested policies under this view?

1. sound fundamentals 2. selective interventions 3. cooperation

Why did Bretton Wood fall apart?

America had a large trade deficit, foreign countries had alot of $ and the demand for gold was high, America couldn't handle the demand for gold so in 1970 nixon took America off the gold standard

What is the economic growth?

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another

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

As a country develops the death rate decreases while the birth rate stays constant, so the country experiences a population growth increase until the birth date finally begins to decrease

What does ASEAN stand for? Which countries are in ASEAN?

Association of Southeast Asian Nations Malaysia, Thailand, and Indonesia

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

Definition of GDP deflator: a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 Definition of consumer price index (CPI): a measure of the overall cost of the goods and services bought by a typical consumer.

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?

Developing countries have much cheaper prices

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.

Define the term Gross Domestic Product. Explain carefully which transactions in the economy are included in GDP.

GDP is defined : the market values of all final goods and services produced within a country during a given period of time GDP=Consumption+investment+govt spending(exports-imports). Only production within country's boarders count towards GDP. Only final goods and services

What is the difference between GNP and GDP?

GNP= total worth of production and services by homeland or foreign land. GDP= total worth or production and services within countries boundaries by its nationals and foreigners

What are the differences between the Gold Standard and the Bretton Woods system? Particularly, what did every currency peg to?

Gold standard: all currencies were tied directly to gold, all currencies in the world were linked together in a system of of fixed exchange rate Bretton wood system: the $ became the anchor currency

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

HPAE's stand for High Performing Asian Economies 1950's Japan 1960's ( Asian Tigers) Hong Kong, Taiwan, South Korea, and Singapore 1970's: Malaysia, Thailand, and Indonesia

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 TPF growth means that the East Asian countries will continue with rapid, spectacular economic growth without slowing down. The reason because the high TFP growth indicates high technological progress.

Which countries are Asian Tigers?

Hong Kong, Taiwan, South Korea, and Singapore

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?

If convergence hypothesis is valid, then the poor country will grow faster than the rich country (so that they will converge to the same income level at the end). The study test for a negative relationship (minus sign) between the initial starting output level (y0) and the growth rate of output (gy). The result finds a negative relationship between these two variables - the country with low starting output level tends to have higher growth rate. The study supports the convergence hypothesis

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,

. Explain why the two approaches of calculating GDP produce the same estimate of GDP.

Income approach: National income + indirect business taxes + depreciation= GNP. GNP - Factor Payments from abroad + Factor payments to abroad = GDP Expenditure approach= C+I+G+Net exports

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. How to know that we encourage the "right" industries? Government develops a set of targeted industries and sees whether this set fails or succeeds. Government may continue switching targets. Or, it may stop looking for better targets when the favored target performs well enough.

Briefly explain the Kuznets inverted-U shape 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 are the problems in rural development? How do Asian governments try to alleviate such problem? Give examples of agricultural development policies.

Low productivity and limited access to credit market Government policies include: invest in rural infrastructures, invest in health and education, land reform, microfinance, research and provide modern inputs, price stabilization

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)

What are the differences between market-based competition and contest-based competition?

Market Based: Western-style Many small firms compete in the market No government interference This is like giving a playground and let children do what they please. If the children are well-behave, we will get good results from the play time Content-based competition:Asian-style (Japan, South Korea) The number of competing firms are small Evenly matched firms are preferable than to have one large firm competes with many small firms. More like „sport competition‟ of same size, good players. Focus more on competition and cooperation. Government acts as a referee.

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?

Positively related variables: Education Openness Government saving Quality of government institution Growth of working-age population Negatively related variables: Natural resource abundant Landlocked Tropics Population growth

According to the World Bank (1993), what are the common characteristics between the HPAEs? Briefly explain each characteristic, comparing to the other developing countries

Rapid and sustained economic growth Declining income inequality and reduced poverty Declining in agriculture's share, but rising agriculture productivity Rapid growth of exports Rapid demographic transitions High investment and saving rates Rapid human capital formation Rapid productivity growth

Why do East Asian governments use industrial policies? What would be justifications for such interventions?

Tax policies, Export Processing Zone, Import substitution The infant industry argument,Inter-industry spillover,Industrial targeting,Coordination Failures,Informational externalities,Inward foreign direct investment (FDI)

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 the higher the number is the more income being unequally distributed among people in the country.

what is the green revolution

The Green Revolution brought modern science to bear on a widening Asian food crisis in the 1960s. The speed and scale with which it solved the food problem was remarkable and unprecedented, and it contributed to a substantial reduction in poverty and the launching of broader economic growth in many Asian countries. Improved cereal varieties, fertilizers, irrigation, and modern pest control methods lay at the heart of the Green Revolution

What is SDR?

The SDR is an artificial "basket" currency used by the IMF (International Monetary Fund) for internal accounting purposes. by some countries as a peg for their own currency, settle international accounts and lending used as an international reserve asset

What is infant industry argument?

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.

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

There is a lag between death rate decline and birth rate decline due to demographic transition, death rate sharply declines and birth rate stays the same for sometime, until eventually slowly declining

In which part about HPAEs' economic growth that Paul Krugman disagreed with the World Bank (1993) report?

There was no miracle behind the East Asia's growth but simple capital accumulation. These countries will not be able to sustain their rapid economic growth and may end up like the Soviet Union, once resources were exhausted. In the growth model, input-driven growth is not sustainable because of the law of diminishing returns. Without technological progress, the economic growth will slow down.

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

They all have increased exports of manufactured goods

According to Lim's (1996), what is "the low-level equilibrium trap"? How would a turtle economy break away from this trap?

They are poor nations to start off with. Therefore, there is not much to spare in investment in infrastructure. They are not able to accumulate capital stock and human capital. They are stuck in the "low-level equilibrium trap." To break away from this vicious cycle, the turtle economies have to increase domestic saving (giving up current consumption to increase investment

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

They invested more in basic education rather than higher education. by subsidizing primary education, it put children into school, making them want to go to a secondary school, increasing education

What do the diminishing returns to capital mean? How to show that on the production function graph?

This means that additional capital added to the economy has less and less effect in increasing output. This is the law of "diminishing returns to capital" As k increases, MPK decreases

trade surplus? trade deficit

Trade surplus= exports > imports trade deficit = imports > exports

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

Using the nominal GDP will overstate changes in economic activity. This is due to the price effect that is embedded in nominal GDP, so we must correct it.

. How did the Asian governments promote exports?

Welcome technology transfers ◦ Open to foreign direct investment (FDI) ◦ Subsidized manufactured exports (ex. Tax holidays, direct lending with low interest rate) ◦ Devalued currencies to support exporting sectors (before 1997)

How does the buffer stock work?

When there is a good year, the government buys up surpurlus to keep the prices from going to low, When there is a bad year, government can sell agriculture commodities from there buffer stock to avoid an increase in agriculture prices

What is the rule of 70?

a countrys growth will double in 70/x x= countries growth rate

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.

What factors determine the output in the economy?

an increase in the amount of output produced by a given number of machines or workers. Improve efficiency→ assembly line (more output per worker) Technological change→ new ideas, new methods, new invention

Saving-investment identity: closed vs. open economy.

closed economy: An economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy's borders. open economy: opposite of closed economy, does trade with other countries and regions to provide for consumers

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

death rate sharply decreases due to better nutrition greater access to medical care improved sanitation more widespread immunization

How do we compute a country's openness? What does it imply?

exports+imports/GDP less trade restrictions, more free economy

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

global poverty line = 1.25/day

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

growth in capital inputs and labor inputs had ability to adapt and adopt foreign technology, which enhanced their technological progress. With high TFP growth, the countries experienced rapid economic growth

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

growth increases

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

hong kong

What is the condition for the steady-state equilibrium?

i = dk and there is no change in capital stock. If the change of capital per worker is zero, then there is no change in output per worker. Thus, the growth rate of output per worker is zero.

How the HPAE governments increase agricultural productivity?

improved infrastructure roads electricity and irrigation improved agriculture technology support agriculture and research create lending markets to farmers

What is Solow residual?

is the leftover of all information from the growth accounting (gTFP). It can be computed as growth of output - contribution from labor input growth - contribution from capital input growth Solow residual might capture the error in the data

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

it will increase or decrease depending on what the savings does, until it reaches its new steady state

What is the Malthus' population growth trap?

malthus believed that population would surpass the earths ability to produce food for the population

What is the life expectancy?

mortality at all ages, expected life span of average person

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

no because without technological progress, growth rate would slow down because of diminishing returns

Did Samsung decide to become an electronic manufacturer based on its comparative advantage in electronic production?

no it was due to political pressure

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

normalized average of prices relative to goods and services in a given region during an interval of time. It can compare prices from different time periods which can be used to see how prices increased or deceased (inflation rate)

. Examples of population control policies East Asian countries

one child policy taxes on families with certain amount of children

What is the IMF?

original purpose was to monitor the bretton wood system current role: Advisory members' economic policy - Give financial assistance for troubled economy from financial crisis - Issue SDR

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

output per worker level will increase or decrease

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

people who have been out of work so long that they have given up on finding a job and are now considered not in the labor force. By saying he is not in the labor force it effects the total number if he suddenly does get a job because he was already calculated as not in the labor force

What is the Lorenz curve? What does it represent? What can you tell about the shape of the Lorenz curve?

plots the cumulative share of income versus the percent of households considered in the cumulative share measures inequality the shape can determine hoe bad the inequality is in the country.

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

singapore

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

singapore

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

south korea

What is natural resource curse? How do we explain the phenomenon?

strong negative link between resource richness and economic growth → support "natural resource curse" hypothesis

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

the amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time. investing is taking that extra disposable income and investing into some type of capital expecting a return

What is land reform?

the redistribution of property or rights in land for benefit of landless, tenant farmers. land distribution from diseconomies of largescale enterprise to increase returns to a land.

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

there were two types of growth 1. Investment-driven economies: Indonesia, Malaysia, Singapore 2. Productivity-driven economies: Taiwan, HK, S. Korea, and Thailand

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

they are a very underdeveloped country and do not have the same resources such as developing and developed countries.

What was the role of the U.S. in Bretton Woods system?

to be the anchor currency and not inflate there currency too much

what are the purposes of microfinance

to promote access to credit for rural land Enable borrowers with viable projects but lacking collateral to avail themselves of financing intended for farm diversification and offfarm/non-farm micro-enterprises that can generate cash flows within the short term. Lend

How unemployment is measured and how the unemployment rate is calculated

unemployment rate = percentage of labor force that is unemployed number of unemployed/labor force x 100