Economic Development and innequality

Question 1

3 causes of wealth of nations

Answer 1

System that efficiently allocates resources
Application of technology
Distribution of wealth through society

Question 2

Rostow’s 5 stages of development

Answer 2

1. Traditional society
2. Pre-conditions to take-off
3. Take off
4. Drive to maturity
5. Mass consumption

Question 3

2 aspects of Harrod and Domar growth model (2)

Answer 3

Savings Ratio

Incremental capital-output ratio (ICOR)

Question 4

How is warranted growth rate calculated using the H+D model?

Answer 4

Savings ratio/Incremental capital output ratio

Question 5

How is natural growth rate calculated using the H+D model?

Answer 5

Rate of growth of workforce x labour productivity

Question 6

How does the balance between natural and warranted growth affect employment?

Answer 6

natural rate acts as potential GDP , warranted growth acts as Real GDP therefore deciding output gap

Question 7

H+D observed effect of lowering WR?

Answer 7

Reduction in AD

Question 8

2 aspects of Arthur Lewis model

Answer 8

A modern capitalistic sector

Traditional subsistence sector subject to LDMR

Question 9

How is growth achieved in the Arthur Lewis model

Answer 9

The transfer of surplus underutilised labour from the traditional subsistence sector to the modern sector

Question 10

Arthur Lewis model expectations from surplus labour (4)

Answer 10

Wages should be low to ensure employment
Profits must be invested in productive capital not consumption
Investment should be appropriately allocated to capital not labour to prevent highly skilled elite
Inequality will be created by an initially concentrated modern sector until traditional sector integrated

Question 11

3 Problems with Import substituting substitution

Answer 11

International prices can override domestic ones
Can contribute to leakages in economy through brain drains or imbalanced trade of valuable resources
Infant industries fail to grow due to moral hazard/x-inefficiency from protectionism and lobbying

Question 12

Lewis suggested Urban/rural wage differential

Answer 12

30%

Question 13

Issue with urban bias

Answer 13

Diversion of investment from agriculture can create shanty towns especially when there isn’t a deficit of labour in urban sector and destroy a strategic industry

Question 14

Whys should convergence occur according to neo-classical theory?

Answer 14

Due to LDMR continued growth can only be achieved in developed countries through technical progress therefore investment should be diverted to areas of low capital

Question 15

What is the most important resource in endogenous growth theory?

Answer 15

Creative enterprise

Question 16

Why is important for society to support education and property rights in innovation?

Answer 16

Due to adaptation the returns on an innovation may be rapidly diminishing to the firm but not society creating market failure disequilibrium

Question 17

Clientelism?

Answer 17

An economy based on favours and haggling where transaction costs are high

Question 18

Role of instituions

Answer 18

Enforce law in markets to prevent clientelism and overcome differences between operators that cause transaction costs to be high