Topic 1 Flashcards
What are the 4 facets of the economic problem
- resource allocation
- economic efficiency
- full employment of resources
- optimal economic growth
what is development
the process of improving the quality of all human lives and capabilities by raising peoples self esteem, freedom and sustenance
what is development economics
- study of how to increase when structural transformation occurs from ag to industrial economies
- involving increase in real output over long term and a reduction in poverty/inequality
What is meant by multidimensionality when measuring development?
involves more than just income GDP
1. living a long and happy life
2. being well nourished and healthy
3. being literate
4. being well clothed
5. being able to take part in community life
What are the differences in how the old and new version of the HDI are calculated?
The old HDI used arithmetic mean which was easily influenced by outliers meaning that if education performed well, it would offset a poor performance of life expectancy.
The new HDI assigned equal waiting to all 3 indexes
1. Life Expectancy at birth (remains the same)
2. Education Index (changed)
a. Old: adult literacy rate2/3 + Gross enrolment ratio1/3
b. New: mean years of schooling for someone > 25 + Expected years of schooling
3. Income Index (changed)
a. Old: GDP/ capita
b. New: GNI/capita (includes $ from abroad)
what are the the common features (7) of a developing economy
- low levels of living and productivity
- high levels of inequality and absolute poverty
- high population growth rates
- greater social fractionalisation
- large rural populations
- low level industrialisation
- external dependence
Outline the characteristics of the sectors the Lewis Model outlines
This model outlines the transformation from agricultural to industrial sectors
1. Agricultural Sector: low productivity, surplus labour, low wages
2. Industrial Sector: high productivity, shortage labour, high wages
What is the process and outcome of the Lewis Model
- Surplus ag labour goes to industrial sector
- All industrial profits are reinvested to expand productivity
- Capital accumulation increases labour demand
- Once MPL in both sectors equalises then labour migration stops
- As MPL of labour in ag increase (when everyone leaves) their wages rise
Outcomes: Shift from low to high productivity enhances growth and development
WHat is the Lewis turning point
employment expands until surplus is absorbed in modern sector
- Wages in ag sector start to rise so demand to work in it rises
- higher demand means industrial sector must increase wages to retain workers
- both sectors improve wages and working conditions
- firms may invest in tech that you don’t need workers to save on wages
what are the 4 assumptions and their critiques of the lewis model
- Assumes capital is invested in more sophistic labour-saving technology
- Full Employment in modern sector and surplus labour in traditional sector (invalid eg china)
- Constant real urban wage increases until Lewis TP: institutional forces (unions) usually negate competitive forces and urban wages rise over time
- Diminishing return in modern industrial sector (they’re actually increasing)
what is the modern view of development
both governments and markets fail and balance is required
briefly outline the 3 fundamental ingredient of growth
- capital accumulation:mobilising domestic savings and investing in capital
- growth in population
- tech progress
a)Labour Augmenting Tech Progress: higher productivity of existing labour (same output, fewer inputs - horizontal PPF moves out)
b) Capital Augmenting Tech Progress: higher productivity of existing capital (same output, fewer inputs - vertical PPF moves out)
c) Neutral Tech Progress: same inputs makes higher output (both PPFs move out)
What does the SOlow Swan Theory Explain
Kaldors Growth Factors
1. output per head (y) grows over time and growth rate doesn’t tend to diminish
2. capital labour ratio (k) grows over time
3. rate of return to capital is constant
4. capital output ratio (K/Y) is constant
5. the shares of capital and labour are constant
6. growth rate of y differs across countries
why does convergence occur (3)
- tech transfer (imitating other ppl’s products)
- factor accumulations (developing countries have less capital so investments make more profit bc higher MP, so greater growth in capital stock)
- steady state model (the further away your are from steady state the more you grow
what is absolute beta convergence
Each country grows faster the further away they are from their own steady state relative to each other.
Poor countries have a lower steady state, so they are predicted to grow faster if they’re not near their steady state.
Rich countries are closer to their steady state so grow slower.
Countries will eventually converge in their growth.
what does absolute beta convergence assume
that closed countries have the same s, n, x, delta and production function so therefore same steady state
what is conditional beta convergence
each country has their own steady state so they grow faster the further away they are from their own steady state relative to each other. poor countries don’t grow rapidly if they’re already close to their own steady state (now each countries has there own parameters, not all the same steady state)
Do we observe convergence in reality
No evidence of convergence but literature suggests that it is possible, but the speed of convergence is very slow (170 years). Sectoral Convergence between countries with similar levels of growth parameters have similar steady states and can experience convergence in particular sectors.
what is the middle income trap
the U shaped patterns of convergence, middle income countries growing fastest but can’t break out of middle income (poor speeding up but rich slowing down)
what is sectoral convergence
countries can be different but if you make tectiles you’ll have similar tech, difference in tech will be reflected in need for cheaper labour in poor countries which is why more textile making happens there (slow growth of manufacturing sector)
what is exogenous growth theory
exogenous tech given outside of model = source of growth (can’t nalayse determinants of differences in tech b/w countries)
therefore tech is held constant and can’t explain long term growth
what is endogenous growth theory
econ growth is determined within production process. explaining difference in sollow residuals allowing for increasing returns.
public and private investments in human capital generate tech spillovers and productivity improvements
Explain multiple equilibria
as more people enter the market it makes it profitable for the first producer who made the initial investment, every new person spills their knowledge to the first so he benefits
what is the theory of complementarities (multiple equilibria)
eg knowledge
S shaped function (increases at increasing then decreasing rate because some agents take complimentary action when others don’t)
if more agenst invest there are greater spillovers and curve rises faster
after lots of investment, most agents are positively affected and so rate of increase slows this pushes to eql when privatley rational decision curve crosses 45 degree line (=expected)
what is the theory of quality matching
it is better putting all low and all high quality workers together . poor countries invest in less complex tasks
what does de jure and de facto mean
de jure: by law - determined by incentives of politcians
de facto: through lobbying - dtermined by distribution of resources
what are the 2 characteristics of institutions
- shape incentives of key actors and distribution of resource
- endogenous since they are determined by choices of society and political power
what is institutional reversal
Highly urbanised regions before being colonised now are doing worse than low urbanised ex colonies
What are the four principles upon which an inequality measure should be assessed?
Relative income principle, anonymity principle, population principle and Dalton principle because the Lorenz principle is dependent on other principles
explain the 4 principles of inequality measurement
- anonymity principle
- population principle: size of population is irrelevant because the distribution can be normalised
- relative income principle: absolute income levels are not important, only relative Y matters
- Dalton Principle: giving money from rich to poor will decrease inequality (regressive transfer)
Why can’t you compare two income distributions using Lorenz curves if they cross
If they intersect, the gini coefficient and coefficient of variation might give different answers and this may violate the Dalton principle. We cannot make inequality statements therefore it’s an ambiguous comparison
what is the lorenz criterion
states that if a new lorenz curve lies on the right of an old lorenz curve of a different income distribution, it will be more unequal.
what inequality measures satisfy the lorenz criterion
Inequality measures are consistent with the Lorenz criterion ONLY if simultaneously satisfying all four principles because the lorenz curve drops all information on income and population and only retains the SHARE of population
what are the 5 inequality measures
- mean average
- range (R)
- mean absolute deviation (M): the mean of all standard deviations, measures dispersion of income (higher M = more unequal)
- coefficient of variation (C): ratio of st dev to mean weighing heavier the larger deviations
- gini coefficient: the ratio between the lorenz curve and 45 equality line (b/w 0 and 1)
What inequality measures satisfy the Dalton principle:
only the gini coefficient and coefficient of variation satisfy it.
explain the inequality possibility frontier
frontier of how you combine dif inpits and is the maximum you can make from them. on the IPF line = most unequal.
what is the poverty line and what are the 2 types of poverty
a minimum level of acceptable economic participation in a given society
1. absolute = global
2. relative = takes into account the income of a country
what is the 4 poverty measures
- head count ratio: counting the number of those below the poverty line, failing to account for poverty severity
- poverty gap ratio: total poverty gap/ by mean income (per capita intensity of poverty)
- income gap ratio: indicates how far the incomes of the poor fall below the poverty line = total poverty gap/HC x poverty line
- Foster Greer Thorbecke Index
what dies the foster greer thorbecke index say
raises the poverty gap to the power of alpha to address distributional concerns giving a greater weight to those further away from the poverty line
what happens in the foster greer thorbecke index when
1. apha = 0
2. apha = 1
3. apha = 2
- makes poverty gap = 1 so it becomes equal to the head count ratio
- like poverty gap ratio but divided by poverty line instead so poverty will increase if fraction of povo ppl increase or dept of poverty increases
- given a greater weight to account for poverty severity
Is using measures of average income across countries as a way to estimate the numbers of those in poverty a waste of time?:
it is not reflective of the poverty or its extent for the lower isolation of population. Poverty is multidimensional, health and education aren’t reflected and a country may be performing better in that way.
Why is the measurement of the severity of poverty important and how might it be taken into consideration:
The measurement allows us to identify required resources to help populations of of poverty conditions
Resource Gap: resources required to pull population out of poverty (more resources required to pull out those who are in severe poverty. It’s important to identify them to design a targeted policy.
It can be taken into consideration by the Income Gap Ratios: capture the acuteness of poverty and measures poverty relative to total income needed to alleviate poverty.
explain the kuznets curve
as an economy develops, income inequality initially increases and then decreases after a certain level of average income is reached (U shaped curve)
- INTIAL Positive relationship between inequality and development.
- The richest people in developed countries possess smaller share than developing country rich people. The same is true for poor people.
- As you develop you get more unequal before you get less unequal.
what are the trends in fertility, population and development
less developed countries hold 90% of world population and its growing at decreasing rate as family planning becomes normalised
birth rates are falling and death rates are increases
what is a natural population increase
difference between birth rate and death rate of a given population (adjusting for immigration)
What is the theory of demographic transitions?
- Start with high birth and high death rates
- As growth occurs there is more access to medicine so death rate falls faster than birth rates so therefore old people bulge.
- As more kids survive then people have less children so population falls
define crude birth rate, crude death rate, total fertility rate
CBR: number of children born alive each year per 1000
CDR: number of deaths each year per 1000
TFR: number of children for an ave mother
what is the youth dependency ratio and the youth bulge
- proportion of young people under 15 to working population aged 16-64
- lots of young people who are too young to work (even if birth rate falls, the surviving young people will become parents which increases population)
explain the malthusian population trap
rising population and diminishing returns to fixed factors (land) result in a low standard of living - society cannot maintain the high population so death reduces population and then they can maintain themselves only at subsistence level
what is the critique of the malthusian theory
ignores role of tech, little empirical evidence, per capita income is not principal determinant of population
describe the malthusian population trap graph:
x and y axis
curves
x = income per capita
y = growth rates
population growth rate
total income growth rate
eqls: Subsistence (unstable) and Take Off (stable)
what are the 4 types of foreign aid
- Official Development Assistance (ODA): loans or grants from high income/OECD
- Bilateral: politically and militarily motivated
- Multilateral: economically rational
- Private: NGOs, non profits provided financial and tech assistance
differentiate between the western and chinese aid model
- western: we’ll give you something but you must do something for us in return
- chinese: we’ll build you whatever infrastructure you want for access to natural resources
why do donors give aid
political and national security
economic motivations:
- savings gap - hoping for invetsment into country because we don’t have enough savings
-foreign exchange gap- more imports than investment so output growth is limited by available foreign exchange for capital imports
why countries accept aid
economic: supplement scarce resources
political: leverge for leaders or militairy aid
humanitarian
What is aid fungibility:
The interchangeability of different types of aid or assistance within a particular context. Whether funds or resources provided for a specific purpose can be used for other purposes without significant constraint or negative consequences.
draw and briefly explain the outcome of the fungibility graph
x = food exp
y = other exp
if AD’ > CD = greater possibility for aid reallocation
is aid always good
effecive at micro npt macro level. some countries can get aid but have low gorwth eg somalia
list 5 arguments for aid
- Means of achieving economic independence
- Morally essential to eliminate disparities in income distribution
- Necessary to overcome deteriorating ToT
- Reparations necessary for anti-developmental policies in colonial period
- Allows LDCs to pay import repayments and supplement savings
list 5 arguments against aid
- Bilateral aid is tied forcing dominance of developed countries
- Threat to national security
- No conclusive relo between aid and growth
- Aid used as substitute for savings and not as supplement
- Aid inflows are devoted to consumption and only a minimum amount to investment
what do Kuziemko and WERKER STUDY
- Membership in UN security council is associated with a 59% increase in US foreign aid
- When there’s more newsworthy things in sec council, aid receipts from US increased 170%
- After tenure aid returns to pre-election levels
what is a migrant
any person that changes their country of usual residence
foreign born(born in one place, living here) vs foreigner (with dif passport)
what are the recent trends of migration
south (poor) to south is constant
north (rich) to north is decrease
North to South is decreasing post stop of colonisation
South to North is increasing
less destination countries are more departure countries
what are the 4 myths of migration
1.myth of not needing unskilled labor
2. myth of barriers keeping migrants out (temp visas allow seasonal jobs for low wages!)
3. myth that development in home countries lowers migration level (if you send aid to countries > $7000, they won’t leave, < $7000 they will)
4. myth of brain drain
Is the world becoming overrun with migrants
Jobs are being created and taken, migrants take up jobs that natives don’t want. Migration fill dependency gap of aging population. Service costs fall with migration which allows natives to do other jobs.
explain brain drain vs brain gain
emigration of skilled workers undermines the progress in developing countries
brain gain: if see ppl leaving, you’ll want to invest in education to get opportunity to leave as well
what are the 4 causes of migration
- Persisting global wage disparities
- Demographics (youth bulge/ deficit)
- Everything but labour globalisation (lower migration cost and large gains from further mobility)
- Labour demand in industrialised countries (productivity resistant, non-tradable services.
Baumol Effect (1967): wage increase in jobs that have experienced low productivity growth is driven by increases in other jobs that experience high productivity growth
explain financial remittances
Small amounts frequently sent from abroad and received by households not govs used for consumption (food) or investment in human capital (education) but face a high sending transaction cost
small poor countries, remittances make up big shares of GDP
what is dispersion policy
Disperse immigrants amongst country to minimise impact on labour markets and communities
what are social remittances
migrants send back cultural norms like birth rates
paents invest in own education to go abroad rather than have kids
How does the quotient rule help easily obtain the fundamental equation of the SS model?
to express the change in capital per effective worker over time
what goes on the x and y axis of the lorenz curve
x = cumulative population
y =cumulative income
explain briefly the multiple equilibria model and state what are on the x and y axis
when many agents enter a market, the profit to the first investor increases at an increasing rate than decreasy rate.
firstly as more agents invest, there are more spillovers so the curve rises faster
secondly, after lots of agents invest, most agents are positively affected so rate of increase slows
x axis = expected decision by other agents (eg avegrage investment level)
y axis = private rational decision (eg individual investment level)
explain the outcome of the partial equilibrium model
native capitalists benefit the MOST from migrants, imigrants gain a little and native workers lose a little but TOTAL NATIVES gain a lot
in the solow swan model with CONSTANT TECH when is it in steady state?
When it is in steady state what is the growth rate of level variables and per capita variables
when kdot = 0
level variables (Y and C) grow at the rate of population growth (n)
per capita variable DONT GROW, they are constant
what is the golden rule of capital accumulation and when does it occur graphically
kgold is the level of capital that maximises consumption
when the slope of the consumption curve = slope of depreciation
with exogenous labour augmenting tech in the solow swan model what is the growth rate of level lvariables, per capita variables, and per capita per effective unit of labour vairable
level = x + n
per capita = x
per capita per effective unit of labour = savings rate - rate of depreciation
