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Questions for Test 2
ECO 320 Economics of Development
Chapter 1
1. Developing countries share some features (low levels of income, etc.), but they are
quite different in many respects. Explain what we mean by “institutions” and how is
it that developing countries different in institutional development. How would the
differences in the development of institutions make it more difficult to formulate
policies for development and theories of development?
2. Is there a fixed set of prerequisites for development? Explain.
Chapter 2
3. Comment on the following statement: The level and growth rate of real GDP per
capita can be a misleading indicator of development. At the same time, countries
that experience sustained increases in real GDP per capita over time will tend to be
more developed.
4. Why is an understanding of what “development” means crucial to policy
formulation in developing nations? Why do you think a country may have
difficulties in agreeing on a rough definition of development?
5. Why do we use “purchasing power parity” measures when comparing incomes
across countries?
6. Suppose that you had to explain this graph to someone who is not a “visual learner”
– he just doesn’t get pictures. You have to explain every feature of the graph using
words.
7. What are the components of the Human Development Index? What are some
strengths and weaknesses of the HDI as a comparative measure of human welfare?
8. Discuss the Millennium Development Goals. How can the mere act of adopting
these goals as aims of action be beneficial for economic development?
Chapter 3
9. What does it mean to say that “factor accumulation” and “productivity growth” are
important for development? How are they distinct?
10. Most growth models assume that new investment increases the capital stock, that
investment is financed by saving, and that saving comes from income.
a. What is the role of depreciation in determining the level of capital stock in the
future? What can prevent investment from producing the desired amount of
capital?
b. What are the mechanisms (public, private) that can turn saving into
investment? What could prevent people’s savings from being invested
productively for the accumulation of new capital? What other uses could a
country give to people’s saving besides capital accumulation?
c. Besides income of domestic residents, from where else could saving come?
What are ways in which governments could get people to save more
(consume less) out of their income?
11. Explain this equation gY  WK  g K   1  WK   g L   a . What are the limits to
this approach to calculating the factors that contribute to economic growth?
12. An economy is characterized by the following figures. Calculate the economy’s
Total Factor Productivity growth rate.
gY
3.3%
gL
1.7%
gK
4.9%
WK
0.29
a
13. Discuss the five characteristics of rapidly growing countries identified in the book.
14. “Social and institutional innovations are as important for economic growth as
technological and scientific inventions and innovations. Effective institutions are as
important as technological efficiency.” What is meant by these statements? Explain
your answer.
15. What does “convergence” mean? Which countries have “converged”?
16. Why does agriculture decline as a share of GDP as the country becomes richer?
Why are increases in agricultural productivity necessary for structural change?
Chapter 4
17. Suppose the capital-output ratio is 3, the depreciation rate of capital is 5% and the
gross savings rate is 15%.
a. Use the Harrod-Domar growth equation to determine the rate of growth.
b. What policies would have to be implemented to change the gross savings rate
to achieve 4% growth? What role could be played by foreign aid or private
capital inflows?
c. What policies would have to be implemented to change the capital-labor ratio
(keeping the gross saving rate constant) to achieve 4% growth?
18. Suppose that all countries have the same rate of technological progress, the same
depreciation rate, and the same population growth rate. Also assume that the
1/ 3
production function in every country is y  f k   k
d. Use the production function to derive a formula for the ratio of GDP per
worker in the steady state that is predicted by the Solow model.
e. For each country pair below, calculate the ratio of GDP per worker in the
steady state that is predicted by the Solow model. Then calculate the actual
ratio of GDP per worker for each pair of countries.
For output per worker in 2005 (y), use the 2005 value for “GNI per capita,
PPP (current international $)” from the World Development Indicators. For
the Investment Rate (s), use the 1975-2003 average for “Gross capital
formation (% of GDP).”
Country
Investment
Rate (average
1960-2000)
Thailand
Bolivia
29.4%
10.1%
Country
Investment
Rate (average
1960-2000)
Nigeria
Turkey
7.5%
14.9%
Country
Investment
Rate (average
1960-2000)
Japan
New
Zeland
31.1%
21.0%
Ratio of y*
predicted
by Solow
model
Output per
Worker in
2000
Actual
ratio of y
Difference
between
predicted
and actual
Actual
ratio of y
Difference
between
predicted
and actual
Actual
ratio of y
Difference
between
predicted
and actual
$12,086
$7,152
Ratio of y*
predicted
by Solow
model
Output per
Worker in
2000
$1,906
$15,726
Ratio of y*
predicted
by Solow
model
Output per
Worker in
2000
$69,235
$40,176
f.
For which pairs of countries does the Solow model do a good job in
predicting relative income?
g. For which pairs does it do a poor job?
19. A country is described by the Solow model, with a production function of
y  f k   k 1/ 2 . Suppose that k is equal to 400. The fraction of output invested is
50%. The depreciation rate is 5%. Is the country as its steady-state level of outputper-worker, above the steady state, or below the steady state? Show how you
reached your conclusion.
20. In a country the production function is y  f k   k . The fraction of output
invested, s, is 0.25. The depreciation rate, d, is 0.05.
h. What are the steady-state levels of capital per worker, k, and output per
worker, y?
i. In year 1, the level of capital per worker is 16. In a table like the following
one, show how capital and output change over time (the beginning is filled in
as a demonstration). Continue this table up to year 8.
1/ 2
Year
1
2
3
4
5
6
7
8
Capital
Output
Investment
Depreciation
k
16
16.2
y k
sy
1
dk
0.8
4
Change in
Capital Stock
sy - dk
0.2
j.
Calculate the growth rate of output between years 1 and 2. Remember that a
growth rate of output is calculated as Yt  Yt 1  Yt 1 .
k. Calculate the growth rate of output between years 7 and 8.
l. How do the answers to parts c and d suggest “convergence”?
Chapter 5
21. Explain what the text means by a “market pessimist” versus a “market optimist.”
Give concrete examples of policies that would be supported by one but not by the
other, and carefully explain why.
22. What is the role of an IMF stabilization program? Why is it controversial?
23. Explain what the Washington Consensus was. Did it work?
Chapter 6
24. Egypt and Australia have very similar Gini coefficients. Explain what this means.
25. Explain economic reasoning behind the Kuznets curve.
26. Discuss both views of the relation between inequality and growth. Is inequality
good/bad/neutral for growth, and vice-versa? If it depends, what does it depend on?
27. What are alternative policies that can be used to combat poverty? What are the pros
and the cons of the possible policies?
Chapter 7
28. What is the “demographic transition”? Explain it in terms of death rates, birth rates,
etc.
29. Discuss the main theoretical views of the relation between population growth and
development. Explain each in detail.
30. Discuss the evidence of the relation between population growth and development.
Whom does it support and why?
31. What are policies that have been followed to reduce fertility and population growth?
Chapter 11
32. The book states that quality is more important than quantity in investment for
development (although obviously quantity is still important). Give some reasons for
why this is the case – economic, political, etc.
33. The distinction between public investment and private investment is an important
one.
a. What are the sorts of projects that are more appropriately undertaken by the
public sector? What are the projects that belong to the private sector?
b. What are the criteria that are used by government and private agents in
making these decisions?
c. How are (a) and (b) related?
Chapter 13
34. How is financial policy different in developing countries and developed countries?
35. What is the main cause of extremely high inflation?
36. Why would moderate (say, 30%) be beneficial? Explain all the technical reasons
given to support this claim, and discuss whether they are likely to be met in practice.
37. How do negative real interest rates retard financial development? What is the
relation between financial development and economic development?
38. This formula: M = DC + IR relates money growth and inflation to fiscal
policy and exchange rate policy. Explain how.
Chapter 19
39. Explain the theory and the reality of Import Substituting Industrialization.
40. What are the tools of protectionist trade policy? Who are the winners and who are
the losers from a tariff? What is rent-seeking (particularly, under quotas)?
41. Discuss the evidence of the relation between openness to trade and economic
growth. Whom does it support and why?
42. What is the Doha Round of trade talks? What is the promise of this round for
developing countries?
Chapter 21
Hints: each curve in the Australian model of the open economy represents equilibrium in
one market; economies need not be in equilibrium in either market in the short run, which
creates four “zones” of imbalance, and four different zones of policy.
43. Using the tools of the Australian model of the open economy, explain the effects of a
massive capital inflow (or a discovery of an abundant natural resource) on a country.
Make sure to explain why the curves shift and what a country has to do to return to
equilibrium.
44. Using the tools of the Australian model of the open economy, explain the effects of a
Debt Crisis on a country, including the effects of debt relief. Make sure to explain
why the curves shift and what a country has to do to return to equilibrium.
45. Using the tools of the Australian model of the open economy, explain the effects of a
deficit-and-inflation stabilization package on a country, including the effects of an
IMF loan with conditionality attached to it. Make sure to explain why the curves
shift and what a country has to do to return to equilibrium.
46. Using the tools of the Australian model of the open economy, explain the effects of a
drought or a sudden fall in terms of trade on a country. Make sure to explain why
the curves shift and what a country has to do to return to equilibrium.