Midterm

Question 1

“Third World”

Answer 1

a term given to countries that were not fully developed by the US after their emergence as a super power. First world was designed for them and Third World was used to refer to countries who were least developed. The measures used to decide this were the average levels of income and levels of poverty

Question 2

HIPC

Answer 2

Heavily indebted poor countries

Question 3

GDP

Answer 3

the total value of final goods/services produced in an economy in 1 year. The most basic measure of a countries income is the gross domestic product. Measured in either of two ways. Firstly, we can add up the value of all final goods and services produced within the country and then sold. The second way is too add up the cost of all the factor inputs (capital, labor, land) or value added

Question 4

GDP/Capita

Answer 4

divides the countries gross domestic product by its total population. A measurement of standard of living

Question 5

PPP

Answer 5

Purchasing Power Party. Economic theory that states that the exchange rate between two countries is equal to the ratio of the currencies’ respective purchasing power

Question 6

Real vs. Nominal GDP Growth

Answer 6

Nominal prices, sometimes called current dollar prices, measure the dollar value of a product at the time it was produced. Real prices are adjusted for general price level changes over time. These adjustments give us a picture of prices for various years as if the value of the dollar were constant. Main difference between nominal and real values it that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP

Question 7

Headcount Poverty

Answer 7

measures the proportion of the population that is poor. How many are poor? Poverty headcount index Ph=Q/N. Q people with income below the per capita poverty level and N people in the total population index

Question 8

Poverty Gap

Answer 8

measures the extent to which individuals fall below the poverty line (the poverty gaps) as a proportion of the poverty line.
The sum of these poverty gaps gives the minimum cost of eliminating poverty, if transfers were perfectly targeted.
The measure does not reflect changes in inequality among the poor.
In short, how poor are they?

Question 9

GINI index

Answer 9

measures income inequality. Measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents.

Question 10

HDI

Answer 10

Human development index. Statistical tool used to measure a country’s overall achievement in its social and economic dimensions. The social and economic dimensions of a country are based on the health or people, their level of education attainment and their standard of living.
The more money a country has does not mean it will have better human development if there are also deep inequalities.
Ex: Equatorial Guinea is the richest country in Africa, due to high oil wealth within a small number of people, resulting in life expectancy and education to be very low overall.

Question 11

Harrod-Domar Theory

Answer 11

Classical Keynesian model of economic growth
Used to explain an economy’s growth rate in terms of the level of saving and productivity of capital
Suggests there is no natural reason for an economy to have balanced growth

Question 12

Capital Stock

Answer 12

total amount of a firm’s capital, represented by the value of its issued common and preferred stock. Total stock authorized or issued by a corporation.

Question 13

Capital-Output Ratio

Answer 13

the amount of capital it takes to produce one additional unit of output.

Question 14

Lewis dual-economy model

Answer 14

explains the growth of a developing economy in terms of a labor transition between two sectors, the capitalist sector and the subsistence sector.

Question 15

Traditional sector versus modern sector (characteristics)

Answer 15

Traditional Sector:
Rural locations, Agricultural economy, subsistence, small-scale, low technical inputs, low productivity, surplus labor.
Modern Sector:
Urban locations, industrial economy, production for markets, economies of scale, high capital inputs, high productivity, scarce labor.

Question 16

Kuznets Curve

Answer 16

As economy develop, market forces first increase and then decrease economic inequality

Question 17

Solow’s equation (components, and effects on growth rates)

Answer 17

attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth and increases in productivity, commonly referred to as technological progress.
Change in k = sy-(n+d)k
S = saving per worker
Y = income (or output) per worker
N = population growth
D = depreciation
Higher savings rate raises income/worker
Higher population growth or depreciation do the opposite
Technological change is sometimes referred to as the “Solow factor” or “Solow residual”

Question 18

Endogenous growth theory

Answer 18

argues that the economic growth is generated from within a system as a direct result of internal processes.
More specifically, the theory notes that the enhancement of a nation’s human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production.

Question 19

Solow residual

Answer 19

is the portion of an economy’s output growth that cannot be attributed to the accumulation of capital and labor, the factors of production.
It is a measure of productivity growth that is usually referred to as total factor productivity (TFP)

Question 20

Rostow’s stages of growth

Answer 20

model postulates that economic growth occurs in five basic stages: traditional society, transitional society, take-off, mature stage and age of high mass consumption.

Question 21

Debt Service

Answer 21

the cash that is required to cover the repayment of interest and principal on a debt for a particular period.

Question 22

IMF

Answer 22

International Monetary Fund.
Main purpose is not to promote economic development.
Primary purpose is to ensure stability in the international monetary system by: monitoring financial and economic policies of its members.
Providing mainly low- and middle-income countries with practical advice in effectively managing their economies, providing loans to countries that have trouble meeting their international payments

Question 23

World Bank

Answer 23

international financial instritution that provides loans to countries of the world for capital projects.
It comprises two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
Stated goal is the reduction of poverty and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sector.

Types of World Bank Loans: “Investment Operations” in human and physical capital and “policy operations” to support a country’s policy and institutional reforms.
Investment operations account for 70% of loans.
World Bank loan model: Large loans to institutional borrowers (states and development banks) millions of dollars.
Categories of WBG spending: Human capital, infrastructure, public administration, domestic credit, agricultural/rural development and environment/natural resource.

Question 24

Grameen Bank

Answer 24

started by Yunus Bangladesh in 1976 to provide services to the rural poor.
90% of banks shares owned by borrowers.
Credited with publicizing the idea of microfinance as development strategy.
Small collateral free loans, targeted towards women, locate banks in rural villages, require weekly/biweekly repayments with interest limited to amount of loan, insurance program to repay entire loan is borrower dies

Question 25

Moral hazard

Answer 25

the two actions problem. Problem: you can’t observe a borrower’s true type.
Only borrower knows if they will use money in a risky or well-behaved way

Question 26

Effect of OPEC on Third World debt

Answer 26

OPEC members put their money in banks, banks were looking for new borrowers, developing countries needed money but because they remained risky borrowers, banks charged high interest.
This led the “debt crisis” as loans denominated in dollars must be repaid in dollars, so if dollar fails the system fails.

Question 27

Conditionality

Answer 27

the principal means by which the international financial community has influenced economic policy in the developing world.
Conditions such as: reduce state budgets, raise taxes, raise interest rates, control wages, privatization, liberalize imports, foreign investments, devalue currency.

Question 28

Special Drawing Rights

Answer 28

defined as a basket of currencies, is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves consisting of the Euro, Japanese Yen, Pound Sterling and US dollar.
IMF members have SDRs in relationship to the capital they contribute to the IMF

Question 29

Tied aid

Answer 29

is foreign aid that must be spent in the country providing the aid or in a group of selected countries.
Money that a rich country lends to a poor country, on condition that the poor country spends the money on goods from the rich country.

Question 30

Devaluation (effects)

Answer 30

this is an issue with food aid.
Tied aid costs at least 50% more than food bought locally and 33% more than food bought in regional markets.
Does not stimulate local economy.
In fact, by flooding the local market with free food, it decreases the price of locally available food and therefore reduces the incentives of local producers to plant more – perpetuating food shortages and actually undermining agricultural development.

Question 31

Modern vs. Traditional Culture

Answer 31

modern cultures were more conducive to economic development than traditional cultures.

Traditional Culture:
Rural
Communal: priority is survival of the group
Hierarchical society, Kinship ties, Ascriptive values, Defer to authority, Parochialism, Distrust of innovation

Modern Culture: 
Urban 
Individualistic: pursuit of self-interest 
Fluid social mobility 
Nuclear family 
Universalistic values 
Question authority 
Outward orientation 
Open to innovation

Question 32

Weber’s theory about the effect of Protestantism on economic development

Answer 32

Protestantism encourage capitalistic economic development

• Asceticism, disapproval of luxury
• Protestant work ethic
• Moral code
• Emphasis on study, education

Question 33

Malthusian population trap

Answer 33

theory that states as population growth is ahead of agricultural growth, there must be a stage at which the food supply is inadequate for feeding the population

Question 34

Positive checks vs. preventive checks

Answer 34

Malthus believed there were two types of “checks” that in all times and places kept the population growth in line with the growth of the food supply: “preventative checks’ such as moral restraints (abstinence, delayed marriage until finances become balanced) and marriage against persons suffering poverty or perceived as defective and “positive checks” which lead to premature death, disease, starvation, war resulting in what is called a Malthusian catastrophe.
Catastrophe would return population to a lower, more “sustainable” level

Question 35

Demographic transition

Answer 35

is the transition from high birth and death rates to lower birth and death rates as a country or region develops from a pre-industrial to an industrialized economic system.
The theory was proposed in 1929 by the American demographer Warren Thompson, who observed changes, or transitions, in birth and death rates in industrialized societies over the previous 200 years.
Most developed countries have completed the demographic transition and have low birth rates; most developing countries are in the process of this transition
crude birth/death rate vs. Time (development
a. Phase 1: primitive stability
b. Phase 2: epidemiological transition in the rate of population growth,
c. Phase 3: fertility transition (birthrate)
d. Phase 4: modern stability

Question 36

Microeconomic theory of fertility:

Answer 36

family formation has costs and benefits.
Parents choose the number of children to have depending on these costs and benefits.
Therefore, the number of children per family declines when costs rise, benefits fall, or both.
Ex. of costs: pay for school, food, clothes. Time. Healthcare. Housing. Ex. of Benefits: child labor, support in old age, love.

Question 37

Hidden momentum of population growth

Answer 37

a population increase that continues even after a fall in birthrates because of a large youthful population that widens the population’s parent base.
Fewer children per couple in the succeeding few generations will not mean a smaller or stable population size because at the same time there will be a much larger number of childbearing couples

Question 38

Private versus social returns to education

Answer 38

costs/benefits to the individual versus costs/benefits to society.
Tends to result in “over education” in developing countries.
Tends to lead to “brain drain”.
May also lead to political unrest: virtually every revolution led by educated middle-class frustrated by lack of opportunities.

Question 39

Conditional cash transfers

Answer 39

Conditional cash transfer (CCT) programs aim to reduce poverty by making welfare programs conditional upon the receivers' actions. 
The government (or a charity) only transfers the money to persons who meet certain criteria.

Brazil - Pioneer in the development of Conditional Cash Transfer programs
• Means-tested programs to efficiently target the poor while increasing social investment
• Provides cash grants to families who send their children to school and public health clinics
• 93% of the women are the recipients of the Bolsa Family check in, child mortality declines 77% in 10 years
• Bolsa has a lower average drop out rate compared to Brazil’s overall average
• The percent of people who live under $2 a day has declined
• Social spending percentage of GDP has risen

Question 40

Critical juncture

Answer 40

why nations fail: critical junctures- specific political institutions are created at a particular moment in time because of the balance of power and the contextual conditions of that moment in time.
Once created, however, those institutions set up incentives that tend to perpetuate the power of initial actors.
Institutions are sticky because it is difficult to change institutions once they have been set up, even if the power of actors who created them and even if the contextual conditions change

Question 41

Three key differences between colonial experience of U.S. and Latin America

Answer 41

a. Latin America
i. No easy wealth: creates economy of production
ii. Colonized by soldiers and adventurers who wanted to get rich, came alone: “encomienda” model, highly unequal distribution of wealth.
iii. Colonized by the Spanish, and absolutist monarchy, controlled directly by Regents
iv. Catholicism
b. US
i. Rich in gold, minerals: creates economy of extraction

ii. Colonized by settlers who brought families to work their own land: small farmer model, relatively equal distribution of wealth (except in South US)
iii. Colonized by the British, a constitutional monarchy, and given extensive self rule
iv. Protestantism

Question 42

Dependency theory

Answer 42

is the notion that resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy states, enriching the latter at the expense of the former.

Question 43

Import Substitution Industrialization (ISI): definition, associated policies, advantages and disadvantages

Answer 43

a. A trade policy based on the idea that a developing country can industrialize by substituting domestically manufactured products for previously imported manufactured goods.
b. Key components of ISI:
i. Tariffs (raise cost of imports to consumers)
ii. State intervention to subsidize selected industries
1. Loans, infrastructure, subsidies of inputs.
c. Advantages:
i. Establish “infant industries:
1. Like human infants, new industries needed parental (state) protection before they could survive on their own in international markets
ii. Stimulated forward and backward linkages, promoting additional industrialization.
iii. Political support from labor and business.
1. Under ISI, relatively high wages became a benefit (in the form of increased consumer demand) as well as a cost (higher cost of the product).
2. However, since tariffs protected the product from foreign competition, cost mattered less.
3. Jobs and business protected from failure.
4. Both national business and labor unions therefore tended to resist ending ISI protections.
iv. Tax income from tariffs.
d. Disadvantages of ISI
i. Higher consumer prices
ii. Inefficient and uncompetitive industries
iii. Dependence on imports of capital stock
1. Debt
2. Labor-saving technology  unemployment

Question 44

Export Oriented Industrialization (EOI): definition, associated policies, advantages and disadvantages

Answer 44

a. Advantages and Disadvantages:
Demand for manufactured goods grows faster
Price of manufactured goods less unpredictable than primary products
Value added is higher (profit higher)
Creation of synthetics helps rather than hurts
Reliance on foreign markets can cushion economy from domestic recession

South Korea Example: Begin with ISI, to establish infant industries, based on consumer goods in low-tech, labor-intensive industries; Then creates incentives for industries to export goods instead of selling only in domestic markets - lower taxes on profits from exports, no tariffs on imports used in production of exported goods, government subsidies/loans or monopoly rights limited to exporters; Finally, use profits from exports to establish new infant industries, in increasingly capital-intensive and technology-intensive sectors

Can all countries successfully promote exports? Developed country markets are not unlimited: South Korea had special access due to concern about need to prove superiority of capitalism vis-a-vis N. Korea. South Korea was also given leeway by international markets to blend protectionism and open trade, as well as loans and other assistance.

Developing countries compete with each other to supply developed country markets. How many South Koreas/Brazils can there be? According to dependency theory, these countries, which have moved towards industrialization and diversified economies, belong to the semi-periphery. Semi-periphery countries “partially deflect the political pressures which groups primarily located in peripheral areas might otherwise direct against core-states” and thus stabilize the world-system. But they remain a distraction and an illusion: most countries cannot achieve semi-periphery status.

EOI versus “neoliberalism”
Neoliberalism refers to an economic philosophy which embraces free trade, open markets, deregulation, balanced budgets, and privatization, with only a limited role for the state in the economy. Under neoliberalism, the state does not select or promote any particular sector of the economy. Under EOI, the state does selectively promote exports by the manufacturing sector. Under neo, manufacturing exports may increase equally; or not.

Question 45

Export enclave

Answer 45

An enclave economy is defined as an economic system in which an export based industry dominated by international or non-local capital extracts resources or products from another country.
It was widely employed as a term to describe post-colonial dependency relations in the developing world, especially in Latin America.

Question 46

Forward and backward linkages

Answer 46

Hirschman introduces the concept of backward and forward linkages.
A forward linkage is created when investment in a particular project encourages investment in subsequent stages of production. Steel –> automobiles.
A backward linkage is when investment in an industry leads to the growth of industries that supply inputs. Coal

Question 47

Four effects of colonialism on Africa (multi-ethnic states, landlocked countries, slave trade, political institutions)

Answer 47

Establishing territorial boundaries; 
Creation of political institutions, passed on to colonies at independence; 
Economic structures (restrictions against development of native industries competing with colonizers, trade restrictions, resources extraction, establishment of monoculture economies); 
Changes in social structure; Changes in culture: language, religion, education