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MIDTERM STUDY GUIDE______________________________________________________________________________How do you measure economic development and growth?- Capital accumulation promotes growth and development- Human capital and education- Institutions and culture; neighboring countries differ- Geography and its effects on development- UrbanizationThe World Bank seeks to alleviate poverty, while the IMF seeks to support currencies. The latter measures growth through GNI, export diversity, degree of integration- GNI vs. GDP per capita – which measures the standard of living bettero Extreme poverty is <$1/day; poverty is $2/day - Currency Conversion and Exchange Rateso Foreign exchange market and market exchange rate: market trade and investmento Need GNI to determine wealtho Tradable vs. non-tradable goodso Purchasing power parity exchange rate: information on prices of tradables and non-tradables; measure with CPI/ Big Mac Index- PPP exchange rate shows quality of life while FER does noto PPP>FER if non-traded goods are cheaper abroad in poorer countries- CPI is a basket over time while PPP is across countriesWorld Bank Living Standards Measurement Survey in 1980- Strived to obtain the median, not the mean, putting focus on consumption and income andthe prices at the community level- To use repeated cross-sections or panels? Problems:1. There is more food spending in rural areas: there are intra-family conflict and self-control issues. There is low spending food if: there is low BMI, underweight children,spending on other things, or low levels of food consumption2. There may be multiple occupations: the extremely impoverished get a lot of income from multiple sectors, but this is bad because it prevents specialization. This can be explained by reducing risk and unpredictability with diversity, market fluctuations and timing, and lack of insurancea. Static inefficiencies: transportation, shifting tasksb. Dynamic inefficiencies: specialization3. There is small scale business and agriculture: there is very little staff (independent people), higher marginal utility of staff (need economics of scale), very little capital, and small area – there is no innovation because things only get better on a large scale.The remedy is to combine land and labor to get a reasonable scale (only if markets work) and to fix moral hazard in the labor and land markets4. There is low long-term migration and frequent temporary migration – there are high returns to migration, and insurance and credit can be obtained locally5. There is low saving: there is room to save but they loosen their credit constraints by doing so6. There are high interest rates: lenders don’t get extraordinary profits- Potential explanations for these problems include: risk aversion and insurance market failures, contracting problems (moral hazard), and credit market failureThe National Poverty Line: absolute vs. relative, depending on geography, family size, etc. - US: $30.58/day- India: $1.80/ day PPP- Can this be trusted?Poverty- The international poverty line reflects worse conditions than the National poverty lines- Lower poverty line benefits politicians to show incumbent improvement; they can changebenefits and family measures to change their measurements- A Higher poverty line benefits those in need; it’s easier to build a case for political support, so this is also good for political challengersInternational Poverty Line – set by the World Bank- 1990: $1/day- 1993: $1.08/day- 2008: $1.25/day- The National Poverty Line is hard to use for comparisons; it is good for regional data or change over time. Poverty Index: Poverty Head Count: - Is this a good measure? (P2 is best)o Focus: Poverty measure is invariant to changes above z (P0, P1, P2)o Monotonicity: P measure lowered for improvements by poor (P1, P2)o Transfer: Equality improving transfers among the poor make P measure fall – marginal utility (P2)Uncommon indices:- Sen Index: Po (1 – (1-Gp) μp/z) where Gp is the gini index and μp is the mean income - Watts: 1/N Σ ln (z/ Yi) I (Yi <z)Why use income vs. consumption?- Savings and credit skew the use of C- C is wellbeing today (used in a seasonal environment)- Y is wellbeing overtime Human Development Index- The HDI shifts the focus from national income accounting to people-centered policies; it was started in 1990 by UNDP for HDR and in 2010 was updated to the NHDI- Dimensions include health, education, equality, safety, etc. - Indicators include life expectancy, access to health car, BMI, etc. 1. Standardize measures [0,1]2. Find dimension measure by finding the geometric mean of the indicators3. Find HDI by finding the geometric mean of the dimensions- EX: HDI Inefficiencies: - Literacy vs. education as indicators – outcome based vs. process based- Supplanted by the NHDI in 2010, which measures both breadth and depth of povertyGini Index and Lorenz Curve- Lorenz Curve: the population of the total income of the population that is cumulatively earned by the bottom x% of the population- Gini Index: A/A+B = 1-2BInequality Measure: - Scale independence: doubling all income shouldn’t matter- Population independence: smaller population not more equal- Other measures of inequality:o Ratio measures: top % vs. bottom %o Hoover index: how much $ transfer until even?o Thiel index: Tt = 1/N Σ xi/x ln xi/xHarrod-Domar Model- To increase the growth rate, increase s (capital) or 1/c (efficiency)- Equilibrium: when factors grow at a constant rate- HD Model leaves out why s and c are at there current levels – assumed arbitrary. It also leaves out the labor, human capital, and technology factors- HD Model predictso Compares correlation between s and the change in capitalo Change in s and c by changing the exogenous variables to see the effects of capital and outputLewis Model- Dual sector economy: agricultural (traditional) and manufacturing (modern)- In both sectors, there is no unemployment; labor can move between them to maximize wages. E.g., if there are higher wages in modern, then traditional labor will move- When T=0, al people in agricultural are making Wa; then, manufacturing opens with a minimum wage Wm. Wm > Wa- Manufacturers will hire until Wm equals MP, where the marginal utility of labor equals the wage- When Wm = Wa, the Lewis turning point is reached; manufacturing will have to pay moreto entice labor to migrate from agriculture to continue its growth- Profits are reinvested in manufacturing capital, so

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