Final Study Guide

Question 1

How do health and education act as joint investments?

Answer 1

Investing in one tends to improve the other:

1) Act to mutually reinforce each other (children’s health improves school attendance & learning + longer life / better health = better return on edu. investments)
2) EDU teaches basic health skills (sanitation, hygiene) and needed for training of HRH.

Question 2

What is the triple role of health and education in development?

Answer 2

1) Economic (increased productivity)
2) Ends in themselves (capabilities - Sen)
3) Joint Investments (mutually reinforcing, hence spillovers)

Question 3

Market forces can be relied on for improvements in health and education: T or F

Answer 3

False

Question 4

The educational gender gap is significant in which 3 regions?

• East Asia
• Europe
• Latin America
• Middle East
• South Asia
• Africa

Answer 4

Bottom three (Middle east, south asia, africa)

Question 5

Figures for girls lagging in school completion is just as bad in urban areas as rural areas: T or F

Answer 5

False - girls tend to lag more in rural areas.

Question 6

What are the 3 economic benefits to raising education levels specifically for girls?

Answer 6

1) Rate of Return greater for women than men in most LIC’s
2) Would increase women’s productivity AND participation in the labor force and effect future generations through: later mariage age, lower amount of children, better child health
3) Women feel burden of poverty more than men, so improving education would help to break cycle

Question 7

The cost of failing to educate girls equal to almost all of ODA in a given year: T or F

Answer 7

True (92 Billion)

Question 8

How are informal institutions biased toward boys??

Answer 8

1) Boys provide future economic benefits to parents
2) Girls may cost more than boys (dowry)
3) Girls typically move out

Question 9

Little investment in health and education can be explained by?

Answer 9

Market failures and problems of multiple equilibria (implies government action to solve coordination failures)

Question 10

Why is there often not enough spending on basic education needs?

Answer 10

1) Govts. tend to focus on secondary and higher education

2) Education attainment levels used to screen job applicants

Question 11

What incentives exist that push governments and private firms not to invest in malaria treatment?

Answer 11

1) Govts - free-rider problem (easier to wait for others)

2) Private firms worried they will have to provide ultra low meds and thus not be able to recoup R&D costs.

Question 12

Explain the 4 different approaches aimed at fighting child labor (CL):

Answer 12

1) WB sees as expression of poverty and must attack poverty in general to reduce CL
2) CCT’s - aimed at increase school attendance
3) UNICEF sees as inevitable in near term, thus provides support to children and helps to prevent worst cases
4) ILO and HIC activist want to ban CL in worst forms and create export restrictions against countries that use CL

Question 13

What could be the problem with the ILO’s approach toward child labor (export restrictions from LIC’s / import restrictions in HIC’s)?

Answer 13

Children may loose jobs and make them worse off than they were before

1) Children could suffer from malnutrition
2) Could be forced to work in even worse, more informal and thus less protected conditions

*Also - sanctions / export restrictions could make it harder for growth to occur, prolonging poverty conditions

Question 14

In what one set of conditions could a ban on child labor be easily justified?

Answer 14

Conditions of multiple equilibria where low-level poverty trap exists, BUT…

1) Hard to get accurate data on whether such a situation exists
2) Employers may resist a move - hard to push politically (b/c they benefit from low CL wages)

Question 15

Explain Kaushik Basu’s concept of CL as a bad equilibrium (described in graph and text in TS, page 370)

Answer 15

• Assumption is that all unskilled adults are working (vertical line to left - point E1 high level equilibrium)
• When wages are high enough, no children are working.
• If wages fall below a certain threshold, children enter labor force, represented by S-curve.
• This pushes wages down further, forcing all children to work (vert. line to the right represents all children/adults working - E2 low level equilibrium)

*Ban on child labor pushes country from E2 to E1.

Question 16

In general, public health spending tends to target preventative or curative approaches?

Answer 16

Curative, not enough of preventative

Question 17

Types of disease prevention that stand to hugely benefit poor:

Answer 17

• Malaria nets
• Re-hydration
• Malnutrition (targeting young children and preg. women)
• Clean Water

Question 18

True or false: Expected private returns on education rise exponentially with years of schooling completed, but so do the social costs of providing that education

Answer 18

True. Costs of providing high level tertiary education much more expensive than primary schooling.

Question 19

Explain the typical trajectories found in LIC’s of both the social costs of education and the private costs of education:

Answer 19

• Social costs rise rapidly from primary (lowest), secondary (higher), and tertiary (highest). Greatest + ROI (difference between costs and returns to society) are found when providing a few years more than primary education.
• Private costs rise much more slowly or may even decline (but private returns on increased education is huge)

Question 20

The most common measure of absolute poverty is?

Answer 20

Headcount at and below international poverty line

Question 21

Absolute poverty is defined as…

Answer 21

The inability to satisfy basic needs.

Question 22

According to the lecture given on the OECD African Economic Outlook report, what sector offers the most potential for inclusive growth?

Answer 22

High-value agriculture

Question 23

Population in Africa is estimated to be what in 2050?

Answer 23

1.4 billion

Question 24

By 2050, what percentage of the labor force increase will come from Africa?

A) 15%
B) 30%
C) 50%
D) 60&

Answer 24

D

Question 25

In Africa, what portion of the labor force entering the market each year live in rural areas?

Answer 25

2/3

Question 26

What are the major problems with regard to transformation of economies in Africa?

Answer 26

• Job growth not keeping up
• Structural changes too slow
• Productivity still very low

Question 27

What portion of the poor live in chronic poverty? What portion are women, minorities, indigenous peoples?

Answer 27

1/3 live in chronic poverty
2/3 women, minorities, indigenous peoples

*Figures don’t include urban informal sector, who tend to be slightly better off

Question 28

The World Bank’s international poverty line currently sits at what $ amount a day?

Answer 28

$1.25

Question 29

True of False: It is easier to go from absolute poverty to relative poverty than relative poverty to middle income status.

Answer 29

True

Question 30

The Total Poverty Gap measures what?

Answer 30

The total amount of additional income needed to bring all people who currently live under the intl. poverty line up to that line.

Question 31

Very generally, The Foster-Greer-Thorbecke Index measures what?

Answer 31

Severity of poverty in region. Used to help inform the design of CCT programs.
- Reflects fact that poor people benefit more from an income increase than the less poor

Question 32

What are two key features of the MPI (Muli-dementional poverty index)

Answer 32

• Gets at household level data, so gives more voice to the poor (helpful in seeing differences WITHIN countries)
• Reflects multiple and negatively interacting deprivations

*Also, dimensional monotonicity = able to mention HOW poor someone is by number of indicators they are deprived of. Not possible with national level stats.

Question 33

In practice, what are typical gini coefficient levels of countries with high, medium, and low levels of inequality?

Answer 33

High Inequality: 0.5 - 0.7 (rarely above 0.7)
Medium Inequality: 0.35 - 0.5
Low Inequality: Below 0.35

Question 34

Great equality correlates positively with:
A) Longer life expectancy and lower infant mortality
B) Upward Mobility and Trust
C) Less Murder and Mental Illness
D) Less obesity and teen pregancy
E) A and B
F) All of the above

Answer 34

F) All of the above

Question 35

Why is inequality so bad (4 major problems)?

Answer 35

1) Devalues social K (weakens trust)
2) Unfair
3) Undermine social stability
4) Causes economic inefficiency!

Question 36

The Gini Coefficient has what four desirable statistical properties?

Answer 36

1) Anonymity
2) Scale independence (doesn’t matter if measured in $, €, cents, or size of economy etc)
3) Population independence (doesn’t matter how large population size)
4) Transfer principles

Question 37

Functional distribution of income is defined as…?

Answer 37

The distribution of income to factors of production (land, labor, capital) without regard to the ownership of the factors.

Question 38

Personal distribution of income (size distribution of income) is defined as…?

Answer 38

The distribution of income according to size class of persons—i.e. the share of total income accruing to the poorest specific % of a population — without regard to the sources of that income.

Question 39

What is the Kuznet ratio and what does it measure?

Answer 39

Measures income inequality and is calculated by:

Income earned from top 20% of population / income earned by bottom 40% of population

A completely equal society would have a ratio of 0.5.

Question 40

What are the arguments for ignoring poverty and inequality as a country develops?

Answer 40

• Redistribution from rich to poor through land reform and progressive taxes will slow growth & reduce savings
• Too much spending to reduce poverty will slow growth
• Best way to fight poverty is to let country develop and thus trickle-down effect will occur (many cite China as example)

Question 41

What are the arguments for fighting poverty and addressing inequality as a country develops?

Answer 41

• Poverty falls most when growth is accompanied with anti-poverty policies
• Poverty can be reduced w/o rapid growth
• Poor people’s marginal savings rates are not low - investments to improve lot of the poor favor growth
• Strong growth can be achieved with falling inequality

Question 42

How can policies to fight poverty also act to improve growth, or at least not impede growth?

Answer 42

• Poverty itself slows growth (low levels of health, education, savings, etc)
• Rich are NOT major source of local savings & investment in developing countries today (b/c of cap. flight)
• Rising incomes of poor also rises demand for local goods which stimulates production, employment
• Extreme inequality/poverty lead to disincentives to material progress, whereas pov. reduction encourages pub. participation

Question 43

What are two easy ways to improve poverty reduction policies to ensure that they reach the poor people they are intended for?

Answer 43

1) Correct for bias in spending in urban/modern sectors and instead target rural areas.
2) Target women by ensuring they have equal rights, access to resources, increased participation and training, & formal sector employment

Question 44

What would correcting factor-price distortions achieve?

Answer 44

Would reduce artificially high returns to owners of K, and incentivize them to instead invest in more L, leading to more job creation.

Question 45

Two things that make for structural change:

Answer 45

1) growth in existing activities
2) reallocation of L & K to more productive activities

• Problem for Africa is that it is moving in the right direction, but not fast enough to keep up with population growth.

Question 46

What is the definition of Pareto Optimal?

Answer 46

When no mkt. participant could potentially increase her/his economic welfare without reducing someone else’s

**Note: assumes wealth distributed freely. Class of 48 students each has 100€ (totaling = 4800€) vs only Alejandro with 5k and everyone else with 0. Trad economist would say that second scenario is P.O. over the first (b/c theoretically Alejandro could distribute to everyone).

Question 47

What are the 3 core assumptions of markets?

Answer 47

1) Perfect competition (no one actor can influence price through their actions)
2) Perfect Information (all actors possess the same)
3) No externalities (mrkt. prices reflect social costs & benefits)

Question 48

Why is perfect information beneficial to markets and their participants?

Answer 48

• zero transaction costs

- no moral hazard (non-fulfillment of contracts by agents who serve own interests rather than principal’s)

Question 49

Market failures happen when 3 assumptions fall apart. Give examples.

Answer 49

1) Monopolies and Oligarchies can control prices
2) Moral hazard (owners are no longer the managers, and managers incentivized to cheat and mislead owners)
3) Externalities include pollution, global warming, under supply of public goods, and multiple equilibria

** Potentially welfare enhancing transactions do not occur

Question 50

What are states responsible for supplying and give examples.

Answer 50

Public goods such as infrastructure and institutions

State failure happens when supply of these public goods is too low.

Question 51

When is the undersupply of public goods due to the free-rider problem especially pronounced?

Answer 51

When beneficiaries are numerous & spread widely over space & time, making it hard to organize themselves and put effective pressure on government.

Happens even if expected social benefits are much greater than anticipated costs.

Question 52

What is moral hazard as it relates to states??

Answer 52

info. available to gov’ts (ministers & bureaucrats) &raquo_space; info. available to individual citizens… Political agents may not always be inclined to do what’s in best interest of their constituents.
* Thus important role of free media and NGO’s.

Question 53

What are the (impossible) conditions in which states and markets could work together to successfully achieve development?

Answer 53

1) information is perfect so transactions through markets are costless (never happens in real world)
2) agency contracts between citizens & governments are faithfully implemented

Question 54

What are two constraints to judicial systems effectively correcting market failures?

Answer 54

1) Judicial costs often outweigh possible gains from dispute settlements on small transactions in LICs
2) Judicial system themselves may be corrupt, enlarging the failures of the state & market.

Question 55

Define a community

Answer 55

informal org. of people tied together by frequent personal interactions based on cooperative relationships, familiarity and interdependence

*Thus strong basis for trust among group over time.

Question 56

What is the greatest barrier to the development of markets??

Answer 56

Absence of effective means to enforce contracts

Question 57

In what ways could communities serve to correct / mitigate the state and market failures?

Answer 57

Through relations of trust & cooperation. This can help to solve problems of “multiple equil.” & “prisoners’ dilemma”

Question 58

When does community failure occur and what are the main causes of it?

Answer 58

When resource allocation is social inefficient, caused by:

• Trust IN the community, but not outside of it, resulting in broken contracts with outsiders
• Corruption leading to preservation of status quo and lack of innovation

Question 59

10 elements of the Washington Consensus are:

Answer 59

1. Fiscal discipline
2. Redirection of public expenditures to health, education, infrastructure
3. Broaden tax base and cut marginal tax rates
4. Competitive exchange rates
5. Secure property rights
6. Deregulation
7. Trade liberalization
8. Privatization
9. Removal of barriers to FDI
10. Financial liberalization

Question 60

What 3 principles make up The New Consensus?

Answer 60

1) Development should be market-based, but market failures should not be ignored by states
2) Government should not be in the business of production
3) Focus should be on fighting corruption, decentralization, and broadening participation in states and markets

Question 61

mkt forces & competition (especially from the outside) act as a check on states and communities. Why is this important?

Answer 61

In the absence of competition…

1) communities tend to penalize & ostracize innovators who deviate from established norms
2) will tend to preserve obsolete technologies & inefficient, even dysfunctional, institutions
3) resulting in becoming both inefficient & unequal (think E. German computer)