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Question 1

Harrod Domar Growth Model\nProduction Function

Answer 1

Production function with fixed coefficients\nLeontief Isoquants (L–shaped) thus, no substitution between capital and labor. \nProduction function Y = k/v \nv= constant in this model (ICOR) Incremental capital output ratio, measures the productivity of and additional k (more productive = lower v)

Question 2

Harrod Domar Growth Model – Basic growth relationship

Answer 2

s/v – d = g \ns = savings rate \nv = constant (k/Y) \nd = depreciation \ng = growth rate\n\n(change in K = sY – dk)\n\nThus if you save more, and make more productive investments, your economy will grow

Question 3

Strengths of the Harrod Domar Growth Model

Answer 3

1) relatively simple\n2) over short periods of time, in the absence of large economic shocks, it predicts growth rates well

Question 4

Weaknesses of the Harrod Domar Growth Model

Answer 4

1) the Knife edge problem \n2) no substitution allowed between K and L in the production function \n3) no room for technological progress

Question 5

Knife edge problem

Answer 5

If v=k/Y is constant, and K is doubled, Y must double. Then because there is no substitution between K and L, L must also double for Y to double. L doubles at the rate of growth of the population, and for L to double, this rate of population growth (n) must increase the same as the rate of growth of K, n= s/v – d AND THERE IS NO ECONOMIC REASON for K and L to grow at the same rate. (if k and l do not grow at the same rate, then neither one will be fully employed)

Question 6

Solow (Neoclassical) Growth Model

Answer 6

allows for substitution between k and L in the production process–––> therefore it is more appropriate for LDC’s since it allows for growth with use of abundant resource – labor.

Question 7

Solow (Neoclassical) Growth Model production function

Answer 7

expressed in per worker terms \nY/L = f(K/L, 1) y = f (k)\nexhibits diminishing returns \n\nchange in k = sy – (n+d)k \n\nsy >(n+d)k; change in k >0 = capital deepening \n\nsy= (n+d)k; change in k =0, capital widening

Question 8

Steady State in Solow

Answer 8

Where sy = (n+d)k –––> change in k=0 \n\nthe long run equilibrium \n\nto the right of steady state, sy0\nto the left sy>(n+d)k; ^k<0

Question 9

Advantages of the Solow growth Model

Answer 9

1) allows for substitution between K and L (more appropriate for LDC’s)\n2) Diminishing Returns–– production function is more realistic \n3) role for population growth

Question 10

Solow implications at steady state

Answer 10

change in k = 0, y is a constant, BUT y = Y/L and Y is growing at n \nImplies developing countries are expected to grow faster than developed countries and to catch up to the same steady state A…

Question 11

In the Solow model, if there are increases in the savings rate, the capital stock per worker

Answer 11

increases

Question 12

if the rate of population growth increases

Answer 12

there is a lower level of income and capital stock per worker

Question 13

Adding Technology to Solow

Answer 13

^k = sy – (n+d+T)k \n(per effective worker)\n\ny = Y/L ––> Y is growing at the rate of T

Question 14

Engel’s Law

Answer 14

As income increases, the proportion of the budget spent on food decreases ––> demand for agricultural products does not rise as fast as the demand for industrial products

Question 15

As per capita income increases, the share industry (wages and output) of GNP ___ because…

Answer 15

__Increases__ \nas development increases, productivity increase; one farmer produces enough for 70–80 people, the rest of the labor is free to find employment in industry

Question 16

Ricardo’s assumptions for transition from agriculture to industry

Answer 16

1. agriculture sector subject to diminishing returns –– crops need land and land is limited \n2. Labor surplus in agriculture = underemployment; many people would have MPL=0

Question 17

Fei–Renis Model,

Answer 17

Look at notes!!

Question 18

True or False \nIf the rate of depreciation is zero and ICOR=1, the basic Harrod–Domar relationship for an economy states that the growth rate is equal to the savings rate.

Answer 18

True \nThe basic Harrod–Domar relationship is g=(s/v)–d, where g is the growth rate, s is the saving rate, v=ICOR, and d is the rate of depreciation. \nTherefore, if v=ICOR=1 and d=0, we get g=s, which says that the growth rate is equal to the savings rate.

Question 19

True or False \nPaying efficiency wages discourages the use of more labour–intensive production technologies.

Answer 19

True\nThe efficiency wage is above the market–clearing wage of w. At w, L* is the quantity of labor demanded and supplied at equilibrium. At the efficiency wage, the labor market does not clear, and only Lmin quantity of labor is demanded. If the efficiency wage falls to the equilibrium level of w*, more labor could be utilized.

Question 20

True or False \nA feature of the Harris–Todaro model is that an increase in the urban wage requires a decrease in urban unemployment to restore equilibrium.

Answer 20

False \nUrban unemployment must increase to restore equilibrium. This is because at equilibrium, expected urban wage = rural wage. That is, wu=wr => p wu=wr; where p = Eu/(Eu+Uu).\nTherefore, if wu increases, p must decrease to maintain equilibrium. And p falls if Uu rises, that is if urban unemployment increases

Question 21

True or False \nTwo major structural changes accompanying economic development are a rising share of industry and a falling share of agriculture in total output.

Answer 21

Correct. This phenomenon may be explained by Engel’s Law and the increased used of machinery and other methods of raising crops that has made it possible for individual farmers to produce enough food to feed 70–80 people.

Question 22

Total domestic supply must equal

Answer 22

production + imports + |export|

Question 23

Per capita kg/year consumed =

Answer 23

food consumption / total population.

Question 24

Per capita calories per year =

Answer 24

Per capita kg/year * Calories per kg

Question 25

total of the non–consumption uses of good x=

Answer 25

total domestic supply of good x– food consumption of good x

Question 26

True or False \nThe turning point in the Fei–Ranis model is the point in the development process where labour demand has increased enough to generate rising real wages in both agriculture and industry.

Answer 26

Correct. Industrialization can occur without a rise in real wages until all the surplus labour in agriculture is absorbed. Beyond that point, wages must rise in both agriculture and industry.

Question 27

TRUE OR FALSE\n(c) The Gini coefficients for South Korea (=0.331) and Peru (=0.443) reveal that income was distributed more equally in Peru.

Answer 27

Incorrect. A larger Gini coefficient implies more inequality. So, income was distributed more equally in South Korea, not Peru.

Question 28

TRUE OR FALSE\nMinimum wage policies generally hurt those with modern–sector jobs while benefiting the much larger group of workers in the informal sector.

Answer 28

Incorrect. Minimum wage policies are present in the urban sector. They thus benefit those with modern–sector jobs and hurt the much larger group of workers in the informal sector, since minimum wages create situations of unemployment in the urban sector.

Question 29

True or False\nMalnutrition can be widespread even if available calorie supplies, per capita, exceed 100% of the recommended requirements.

Answer 29

Correct. What matters is not national averages, but the distribution of nutrients among various income classes.

Question 30

True or False \nWhen the piece rate falls, the straight line depicting it becomes flatter.

Answer 30

Incorrect. When the rate falls, each unit of output brings in less income and hence the line must become steeper.

Question 31

True or False\n Differentials among the wages received by different skills and education levels are much narrower in developing countries.

Answer 31

Incorrect. Such differentials are much wider in developing countries – dispersions can be as high as 80%.

Question 32

True or False \nImplicit contracts and informal agreements are used to insure against uncertainty in developing countries.

Answer 32

Correct. These are some of the mechanisms used to insure “before the fact.” Such mechanisms allow for income smoothing and consumption smoothing, by ironing out fluctuations in wage income.