Posted: May 9th, 2015

Issues and Topics in Economic Development (EC 390) Homework 1

Issues and Topics in Economic Development (EC 390) Homework 1

Section 1: Multiple choice. Select the choice that best answers the prompt. 1. Of the following, which is the best measure of standard of living within a country? a. Real GDP b. Nominal GDP c. Real GDP per capita d. Nominal GDP per capita 2. Jeffrey Sachs would support which of the following policies? a. Providing fertilizer to poor farmers. b. Subsidizing bed nets to prevent malaria. c. Making vaccines available at low or no cost. d. All of the above. 3. Geographically, poverty is especially prevalent in a. Sub-Saharan Africa b. Latin America c. South and East Asia d. Eastern Europe e. Both a and c 4. For many development issues, Sub-Saharan Africa is the most concerning. However, for other Millennium Development goals like providing access to clean water _________ lag(s) further behind. a. Latin America b. Eastern Europe c. The Middle East d. South and East Asia 5. Over the past 50 years, child mortality has generally a. Increased. b. Decreased. c. Remained unchanged. d. Increased in some areas but decreased in others.

6. A randomized experiment is one in which a. Participants randomly receive the treatment (like getting a new type of fertilizer). b. There is a natural experiment that does not require any human intervention. c. Participants receive the treatment if they meet certain income requirements. d. The results are inconclusive (i.e. appearing random). 7. Suppose that Tylandia has a Gini coefficient of 1. This implies a. There was a calculation error because the Gini coefficient must be less than 1. b. There is perfect equality in Tylandia. c. There is extreme inequality in Tylandia. d. More information is needed. Gini coefficients are only useful for comparing across countries. 8. Suppose that an individual is considered below the poverty line if he/she makes less than $1.25 a day. According to a head count measure of poverty if this person goes from making $1.24 a day to $1.26, the head count measure will ____________ while poverty will practically ________________. a. Decrease; increase b. Decrease; remain unchanged c. Increase; increase d. Remain unchanged; increase 9. Where does inequality occur? a. Only in the developing world. b. Only in the developed world. c. Mostly in Asia. d. Throughout the world. 10. William Easterly, in The Elusive Quest for Growth, focuses on ___________ rather than direct aid. a. Economics incentives b. The existence of poverty traps c. Providing subsidies d. Providing ways to stop malaria to people in developing countries.

Section 2: Short Answer. Answer each question completely. Watch out for questions with multiple parts. 1. Poverty Traps (5 points) a. Draw a graph of a poverty trap vs. one without a poverty trap (as in Poor Economics). Make sure to label both axes and indicate where the “trap” actually occurs. b. Which economist (Sachs or Easterly) believes that poverty traps exist extensively in the developing world? c. What is his suggested policy (aid to the developing world or evaluating incentives)? 2. Gini Coefficients (5 points) Suppose there are two countries: Tylandia and Badlandia. Tylandia has a Gini coefficient of 0.25 and Badlandia has a Gini coefficient of 0.5. a. Which country has more inequality? How do you know? b. Using what you know about calculating the Gini coefficient, if the area under the Lorenz Curve is equal to 0.25, what is the area between perfect equality (i.e. the 45 degree line) and the Lorenz Curve equal to for Badlandia? Drawing the picture may help. c. Would the Lorenz Curve for Tylandia be above or below that of Badlandia (be careful here…)? 3. Growth vs. Development (5 points) a. Define economic growth and economic development. b. Is it harder to measure growth or development? Explain. c. What is one way (an index…) to measure development that we talked about in class? d. Explain why many indices that measure development e. Suppose that in 1990 real GDP per capita was $10,000. In 2000 real GDP per capita was $20,000. What was the average growth rate? Hint: 2^(1/10) = 1.0718. Show all of your work and round your answer to the nearest tenth of a percent.

4. GDP Calculations (5 points) Using the table below, answer the following questions:

Good P($) Computers Haircuts Iced Teas 1000 20 2

US Q 100 50 100 P(baht) 18000 400 50

Thailand Q 10 40 200

a. Find U.S. GDP and Thai GDP in local currencies (do not worry about the distinction between real and nominal). b. What is Thai real GDP in U.S. dollars using the market exchange rate of 1 U.S. dollar is worth 30 Thai baht? c. Calculate Thai real GDP in U.S. dollars using the purchasing power parity method from class. d. What is the implied PPP exchange rate? 5. Inequality and Growth (5 points) a. Discuss the main channel through which inequality may increase growth. b. State, briefly, the four reasons why inequality may decrease growth.