1. Economic Growth and Inequality

Question 1

Give some statistics on World Inequality:

Answer 1

• In 2009, ~75% of the worlds population was below the worlds average income
• In 2009, 20% of the worlds population recieved 60% of the worlds income

Question 2

Describe the growth rate of real income in the US over the last few centuries

Answer 2

• Since 1870, real income grows on average at 1.8%

Question 3

Describe the growth rate of real income in Japan

Answer 3

• Prior to WWII japan’s real income is low but growing
• Drops significantly during WWII
• Grows at a stagaring 5.9% between 1950 and 1980
• Slows to a similar rate to the US after 1980
• Current growth trend unclear

Question 4

Decribe World Growth in Incomes prior to the Industrial Revolution

Answer 4

• Little evidense to suggest any real income growth prior to 1500AD
• Prior 1500AD real income fluctuated to at max between 50-100% between generations
• .04% between 1500-1700
• .07% between 1700-1820
• .14% in Western Europe 1500-1820

Question 5

Explain how to calculate PPP exchange rates

Answer 5

• The PPP ratio is the ratio of the actual output of a country, measured in standard ‘baskets’ of goods and services between countries
• ie, a country that produces twice as much as another will have a PPP exhance of 1 local dollar to .5 foriegn dollars.

Question 6

How does the market exchange rate differ from the PPP rate

Answer 6

• The Market exchange rate overvalues rich countries and undervalues poor countries
• For very poor countries, the devalueation can be as high as a factor of 3

Question 7

Why is the market exchange ratio a poor tool to compare the income of countries

Answer 7

Because poor countries produce less traded goods then developed countries, and the market exchange rate equalizes the prices of expensive traded goods in the poor country with the cheaper traded goods in the rich country, as per the law of one price, ignoring cheaper local services and non-traded goods in teh pioor country

Question 8

What is the rule of 72?

Answer 8

Where t = time in years to double

Question 9

State the compound growth formula

Answer 9

Question 10

State the compound growth formula in terms of t

Answer 10

Question 11

Around how long is the short, medium and long run?

Answer 11

Short run: t < 3 years

Medium run: 3 < t < 10 years

Long Run: 10 < t years

Question 12

What are some problems with using GDP to compare countries

Answer 12

• Says little about income distribution
• Does not track enviromental record
• Does not consider inputs / efficiency