Exam 2

Question 1

Define Health

Answer 1

a state of complete mental, physical, and social well-being and not merely the absence of disease

Question 2

Health-Poverty Trap

Answer 2

Poor economies tend to grow less because they have poor health, and they have poor health because they are poor

Question 3

Private poverty trap

Answer 3

In the absence of public and private healthcare systems out of pocket expenditure is the only means of financing medical care. This implies that, among the poor, life savings (sale of land) will be spent to cure an ill member of the family. Sometimes forces children out of school and into child labor. Affects the wealth of the family and ability to earn future income

Question 4

Beckerian child trade-off

Answer 4

Parents who expect that their children are very likely to die early will tend to have many kids with a hope to end up with some adult descendants. The amount of resources for each child is lowered and as a result each child ends up wth lower education and human capital. (parents substitute away from the quality of children to the quantity of children.

Question 5

Name the ways Health affects Human Capital

Answer 5

1. Unhealthy workers have less productive bodies
2. Health effects education through absenteeism
3. Firms have an incentive to direct their trainings away from workers with a high probability of getting sick
4. Beckerian quality-quantity children trade-off
5. Shorter life expectancies decrease the rate of return of education (sum of the present value of the difference in wages between an educated worker and an uneducated one)
6. Premature death of parents impedes the education of children, so child labor becomes attractive and education is disincentivized

Question 6

Effects of Health on Physical Capital

Answer 6

1. Citizens who live longer have a stronger incentive to save and invest. Shorter life expectancies cause the inverse and decrease national savings and investment
2. Inputs are complementary (if human capital is deficient there is little incentive to invest in physical capital
3. Private-poverty trap too much of savings goes towards health care and thus reduces private investment

Question 7

Effects of Health on Aggregate Efficiency

Answer 7

For low levels of (K/L) producers will choose to use “traditional” (bad) technology. Once they exceed a point of indifference between bad technology and good technology (M) they will begin to exclusively use good “modern” technology. The problem is generating enough investment to break through point M. The poverty trap exists at the steady state of the bad tech production function with stagnant growth because of this.

Health inequality leads to social social unrest which in turn causes conflict.

Question 8

How did the disease environment affect the choice of institution in the colonies?

Answer 8

In areas where disease was prevalent, colonizers implemented extractive institutions; these same institutions were inherited by independent countries and are negatively affecting their growth. In areas where disease was less prevalent they implemented wealth-inducing institutions; these good institutions were inherited by independent countries and they grow faster.

Question 9

What did the Kremer Vaccine R&D fund do and what economic problems does it solve?

Answer 9

The fund would buy the drugs at monopoly patent prices, and either sale them at marginal cost prices or donate them to poor countries. This helped alleviate the effects of health on human capital; specifically, improving the bodies of workers, reducing absenteeism in education, increasing life expectancy. The initiative also effected all health problems inflicted on Physical capital.

Question 10

Define Inclusive Growth

Answer 10

Create equitable opportunities for economic agents. The effort to enact the fair distribution of opportunity across a population.

Question 11

Describe how setting up institutions that promote a business environment (entrepreneurship) increases prosperity.

Answer 11

Reduces social unrest, improves the incentive for physical capital, by improving education the health effects on human capital are decreased

Question 12

List what a culture of entrepreneurship entails

Answer 12

Increased economic freedom (private property rights, investment, justice)

Public infrastructure growth (including the development of labor laws)

Investments in education

Less corrupt government

Question 13

Define Catch-up Growth

Answer 13

A process whereby relatively poorer nations increase their incomes by taking advantage of(emulating) knowledge and technologies already invented in other, more advanced, countries

Question 14

Middle-Income Trap

Answer 14

Sustained growth into high income is harder and slow: requires
higher human capital, new technology (R&D), efficiency of
production (managerial resources) to be competitive, and a very
good business environment.
Middle income countries face double competition: from the low-
wage, low-income countries which still have abundant cheap
labor, and from innovators in advanced economies that
dominate high-tech products and services (R&D).
Middle income countries lose comparative advantage in labor
intensive industries before gaining competitiveness in capital
intensive industries and knowledge-based services.

Question 15

Define the late development effect/ the advantage of backwardness

Answer 15

Developing countries have a vast space and strong driving force to learn the technology, systems and successful experience from the developed countries.

Question 16

Define the Verdoorn Effect

Answer 16

Once a region obtains a growth advantage it will tend to sustain it at the expense of other regions

Question 17

WHat are the 3 aspects of the flying geese model?

Answer 17

Intra-industry

Inter-industry

International division of Labor

Question 18

Explain the intra-industry aspect of the flying geese model

Answer 18

involves the product cycle within that particular country it initially imports the goods; then moves to production combined with imports; finally, it moves to exporting goods.

Question 19

Explain the inter-industry aspect of the flying geese mode

Answer 19

the sequential appearance and development of industries in a particular country; with industries becoming diversified and upgraded from consumer goods to capital goods.

Question 20

Explain the international division of labor aspect of the flying geese model

Answer 20

the subsequent relocation of industries across countries, from advanced to developing

Question 21

What is v equal to and what is its growth rate equal to?

Answer 21

v=x/z
x=income per capita of developing economy
z=income per capita of leading country
v is the ration of the two

V bar= Y bar - C bar
Y bar= growth rate of developing country
C bar= annual growth rate of efficency. (assumption is that developed economies growth is wholly fueled by increases in aggregate efficency)

Question 22

What are the assumptions of the process of imitation and emulation? (phase diagram)

Answer 22

Assumption 1: at any time (t) the value of Y bar depends on the value of v, Y bar= f(v). Meaning that the larger the backlog of technology to be emulated the faster Y bar grows.

Assumption 2: the growth rate of z (C bar) is constant and also the rate of innovation.

Question 23

What are the 4 implications of the phase diagram?

Answer 23

Implication 1: Phase ; 0 to V underscore- for economies with v<v underscore they will increasingly lag behind the leading economy (diverge). Y Bar < C Bar therefore v Bar is negative and V and Y bar are falling. The rate of imitation is lower than the rate of innovation (not adopting the old technology fast enough). Typically, this phase is characterized by a poor business environment and very low contact with R&D.

Implication 2: Phase II; v underscore to v0- for these economies Y bar>C Bar therefore V Bar is positive and v and y bar are both increasing. The rate of imitation is higher than the rate of innovation; they are adopting the technology at a faster rate at which the leading economy is innovating new technology. In this phase, y0, the highest possible growth rate is potentially reached.

Implication 3: Phase III; v0 to v*- For these economies Y bar>C Bar therefore V bar is positive; v is increasing but y bar is decreasing. ( Y bar is decelerating). Technology backlog is reduced and emulation is now harder.

Implication 4: Phase IV; v* to 1- for these economies temporarily Y bar < C bar therefore V bar is negative and v is falling, but y bar is increasing. The economy has overshot and is now correcting

Question 24

Draw the phase diagram for v (the emulation curve)

Answer 24

See slide 18 of ppt 5 for the answer

Question 25

What are the factors that make initial growth in low-income countries so expedient?

Answer 25

it is driven by cheap inputs, high rates of investment in light labor-intensive manufacturing, and emulation of modern technology

Question 26

What are the factors that slow growth in middle-income countries trying to reach high-income?

Answer 26

Sustained growth into high income is harder and requires higher human capital, new technology (R&D), the efficiency of production (managerial resources), and a very good business environment.

Middle-income countries face double competition: from the low-wage, low-income countries which still have abundant cheap labor and from innovators in advanced economies that dominate high-tech products and services (R&D)

Middle-income countries lose comparative advantage in labor-intensive industries before gaining competitiveness in capital intensive industries and knowledge-based services