Development Economics Flashcards
“Poor households in developing countries cannot be lifted out of poverty unless their countries receive foreign aid” is an example of
a) positive economics
b) normative economics
Normative economics - focus on how the economy “ought” to be
What is the relationship between price and demand?
They are inversely related - as price increases, the demand decreases
What is the largest proportion of household expenditure dedicated towards in developing countries?
Food
What can the Production Possibility Frontier be used to measure?
Concepts of efficiency (optimal production and allocation of resources)
What is the point where supply and demand intersect called?
Market equilibrium
What is opportunity cost?
The value of the next-highest-valued alternative use of that resource. Involves calculating the difference between the expected returns on each option.
TRADE-OFF
What is income distribution?
This tells us how the total income of a country is divided between different groups/individuals
What how and for whome trade-offs
Define the law of diminishing marginal returns
Applies when one input (such as labour) is varied but other inputs (such as equipment and land) remain fixed
Each extra worker adds less to ouput than previous worker as facilities must be shared
Which points on the PPF are efficient, inefficient or infeasible? Why?
Points below the PPF are inefficient as the economy is not using all the resources it has available
Points above are infeasible, as it implies using more inputs than the economy as available
Points on the frontier are efficient as the economy is using all available inputs to produce maximum outputs
What can the slope of the PPF curve tell us?
The opportunity cost of a good: how much of one good we have to sacrifice to make more of another
Explain comparative and absolute advantage…
An individual has a comparative advantage compared to another in the production of a good if she has a lower opportunity cost in producing it
Absolute advantage means that that person is the lowest-cost producer of that good
Define the ‘market’
A process by which households’ decisisions about consumption of alternative goods, firms’ decisions about what and how to produce, and workers’ decisions about how much and for whom to work are all reconciled by the ADJUSTMENT OF PRICES
What is a command economy?
An economy that is controlled by the government through central direction and planning - all decisions about what will be produced, how and for whom are conducted by the state
Microeconomic analysis provides…
A detailed treatment of how individuals and firms make economic decisions
Macroeconomics provides…
Analysis of economy as a whole. It simplifies the individual building blocks of the analysis in order to retain a manageable analysis of the complete interaction of the economy
Cross-section data
Record at a point in time the way an economic variable differs across different individuals or groups of individuals
Panel data
Record observations over multiple time periods for the same individuals or groups of individuals
index number
Expresses data relative to a given base value
Consumer price index (CPI)
Measures changes in the cost of living by looking at the cost of a standard ‘shopping basket’ of goods
Which of the following scenario has the potential to cause a fall in the supply of maize?
a) Fast economic growth in India and China
b) An extreme global weather shock
c) The global increased use of biofuels
d) None of the above
Extreme weather shock
When a price ceiling is set below the equilibrium price.
a) will the quantity demanded exceed the quantity supplied?
b) or will the quantity supplied exceed the quantity demanded?
When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.
What is Jeffrey Sachs’ view on poverty traps?
Advisor to the UN.
Poor countries are poor because they are hot, infertile, malaria infested, landlocked. They require an initial large investment to help them deal with endemic problems. Foreign aid can kick-start a virtuous cycle helping poor countries invest in critical areas to help make them more productive.
What is Easterly’s view on poverty traps?
Aid does more bad than good - it prevents people from searching for their own solutions, while corrupting and undermining local institutions and creating a self-perpetuating lobby of aid agencies. Proposes opening up the markets -free trade
What does the S-shaped curve tell us about poverty traps?
For the very poor, income in the future is lower than income today - the curve is below the diagonal line
What does the L-shaped curve tell us about poverty traps?
The poorest earn more than the income they started with and become richer over time, until eventually their incomes stop growing. AID cannot change where poor people are eventually headed
Who proposes using RCTs and what are they?
Randomized Controlled Trials are proposed by Banerjee and Dufflo in Poor Economics. Involve individuals/ communities being randomly assigned different “treatments” - programs or versions of the same program. Individuals are exactly comparable (because they were chosen at random) so it is possible to see the effect of the treatment.
What is GDP and how does it relate to early perceptions of economic development?
GDP is the total value of goods and services produced in a country. It is significant as it is a measure of growth, with the generation and sustainance of growth being perceived as the most significant factor in stimulationg economic development in traditional d thought
What is GNI?
GNI = GDP + factor incomes from abroad for residents - factor incomes earned in domestic economy by those residing abroad.
Development economics often focuses on GNI and GDP growth, per capita
What is the significance of calculating for purchasing power parity? (PPP)
Prices of internationally non-tradable goods are much lower in developing countries
GDP comparisons need to account for differences in purchasing power of the same income across countries
Purchasing power parity: number of units of foreign currency required to purchase an identical quantity of goods and services in the local market as $1 would buy in the USA
What are the limitations of using economic growth as key indicator of development?
The national accounts do not show:
- Non-market activites (e.g. household domestic services)
- Income distribution - GNI per capita does not address inequalities within a country
- GDP growth is a measure of FLOW; it does not measure the weath and stock of a country at any given moment
What is Sen’s Capabilities Approach?
Income growth cannot adequately measure development, for it does not ultimately determine what individuals can be and do.
Focus on:
Functionings: beings (e.g. being healthy, being educated) and doings (e.g. working, voting in an election)
Capabilities: combination of functionings that are available to the individual. Places intrinsic value on the real freedom or opportunity to achieve one’s choice of functionings.
E.g: Income is essential, but in order to convert it into functionings, education and health investments may be required. Different individuals can have completely different capabilities even if their income is identical
What is HDI?
Index of human development based on combined measures of education, health and income; ranks all countries on scale of 0 (lowest HDI) to 1 (highest HDI)
What are the potential limitations of HDI?
Equal weights are given to the three dimensions; this embodies an implicit normative judgment.
Quality should also matter both in education (quality of schooling) and life expectancy (quality of life).
In the “new HDI”, imperfect substitutability is desirable, but it is unclear that the geometric mean is the best way to reflect this.
Similar values of the HDI may hide important within-country inequalities (gender, regional and social disparities)
At what point does the positive correlation between income and self-reported happiness disappear?
$15,000-$20,000 per capita
What is a limitation of authors such as Layard focusing on happiness as measure of development?
Correlation does not imply causality: little is known about what really causes happiness or life satisfaction.
Happiness is, at best, an important functioning; but there are many others e.g. equality
Reporting bias in self-reported life satisfaction, hampers international comparisons
What is the relationship between utility of income as this increases?
There is a diminishing marginal utility. As income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness.
Why was the concave logarithmic transformation introduced in 2011 to better measure HDI ?
This means that the concave logarithmic transformation makes clearer the notion that an increase of GNI per capita by $100 in a country where the average income is only $500 has a much greater impact on the standard of living than the same $100 increase in a country where the average income is $5,000 or $50,000.
What is a low-income country, according to the World Bank?
Countries with a GNI per capita of less than $1025 in 2011.
How does the UNHDP measure educational index?
Actual educational attainment of the whole population and the expected attainment of today’s children. Actual attainment is measured through average years of schooling. HOWEVER a year of schooling in Mali tends to learn more than a child who is provided with a year of schooling in Norway. This is often subjective and difficult to measure qualitatively
What contributes to Human Capital?
Health, education and skills
What is the relationship between inequality and poverty?
These are conceptually different; they don’t need to coincide or evolve in parallel
What does inequality of opportunity help to explain that inequality of income cannot?
Focused on root causes of inequalities later in life
Underdevelopment traps open up at early ages and need to be tackled as early as possible
Expains large proportion of outcome inquality in developing word
What are possible policy responses to poverty and inequality?
Progressive taxation, asset redistribution, investments in human capital and infrastructure, tackling discrimination
How can inequality be measured by size distribution?
Personal distribution of income:
- The distribution of income according to size class of persons—for example, the share of total income accruing to the poorest specific percentage or the richest specific percentage of a population— without regard to the sources of that income.
- Economists tend to divide population into groups/sizes called quantiles (fifths) or deciles (tenths)
How can inequality be measured using a Lorenz curve?
Graph depicting the variance of distribution of income from perfect equality. Diagonal line represents ‘perfect equality’ in size distribution of income. Numbers of income recipients plotted on horizontal axis in cumulative percentages.
What is a Gini coefficient?
An aggregate numerical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality). It is measured graphically by dividing the area between the perfect equality line and the Lorenz curve by the total area lying to the right of the equality line in a Lorenz diagram. The higher the value of the coefficient is, the higher the inequality of income distribution; the lower it is, the more equal the distribution of income.
What does the functional or factor share distribution of income attempt to represent?
The share of total national income that each of the factors of production (land, labour and capital) receives
What is the Headcount index?
Proportion of country’s population living below the poverty line
Define the total poverty gap…
How does calculating the poverty gap prevent govs. from cooking their books?
Measures the total amount of income necessary to raise everyone who is below the poverty line up to it. Cannot be manipulated through income transfers amongst the poor.
Calculated by multiplying the head count ratio by the average value of fractional shortfall among the poor - poverty measured in degrees
Gov. can take money from the poorest and give it to those just below the line
Is there a nutrition-based poverty trap?
It is a myth that the poor don’t eat enough now and that there is a link between malnutrition and poverty. The poor purchase fewer calories now than they did 40 years ago and this often costs very little (10pence in Phillipines). Nutritional norm changes over time.
There is, but not in the traditional sense. Instead of cheap calories human development needs a quality diet, especially in early years. Policies should focus on micronutrients.
What are income poverty lines used for?
Poverty line reflects what is believed to be the minimum acceptable standard of living ($2 a day rn). Used for marketing towards donor agencies and measuring economic progress. Often arbitrary, a ranges of “scientific” lines are acceptable. Defined as much by politics (and ramifications of redistribution) as by science (DEATON)
