MIDTERM STUDY GUIDE How do you measure economic development and growth Capital accumulation promotes growth and development Human capital and education Geography and its effects on development Urbanization Institutions and culture neighboring countries differ The 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 better o Extreme poverty is 1 day poverty is 2 day Currency Conversion and Exchange Rates o Foreign exchange market and market exchange rate market trade and investment o Need GNI to determine wealth o Tradable vs non tradable goods o 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 not o PPP FER if non traded goods are cheaper abroad in poorer countries CPI is a basket over time while PPP is across countries World Bank Living Standards Measurement Survey in 1980 Strived to obtain the median not the mean putting focus on consumption and income and the 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 consumption 2 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 insurance a Static inefficiencies transportation shifting tasks b Dynamic inefficiencies specialization 3 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 markets 4 There is low long term migration and frequent temporary migration there are high returns to migration and insurance and credit can be obtained locally 5 There is low saving there is room to save but they loosen their credit constraints by doing so 6 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 failure The National Poverty Line absolute vs relative depending on geography family size etc US 30 58 day Can this be trusted India 1 80 day PPP Poverty The international poverty line reflects worse conditions than the National poverty lines Lower poverty line benefits politicians to show incumbent improvement they can change benefits 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 challengers International 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 p z where Gp is the gini index and p is the mean income Watts 1 N 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 Indicators include life expectancy access to health car BMI etc Dimensions include health education equality safety etc 1 Standardize measures 0 1 2 Find dimension measure by finding the geometric mean of the indicators 3 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 poverty Gini 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 2B Inequality 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 xi x ln xi x Harrod 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 o Compares correlation between s and the change in capital o Change in s and c by changing the exogenous variables to see the effects of capital HD Model predicts and output Lewis 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 Manufacturers will hire until Wm equals MP where the marginal utility of labor equals minimum wage Wm Wm Wa the wage When Wm Wa the Lewis turning point is reached manufacturing will have to pay more to entice labor to migrate from agriculture to continue its growth Profits are reinvested in manufacturing capital so capital increases the turning point increases and the sector is more productive If there were no price floor more people would migrate at a lower wage in the first period Without a minimum wage there would be more profit a bigger change in MP Demand for manufacturing the wage in manufacturing would constantly rise and migration