1) Circle to indicate whether the statement is true or false.

Transcription

1 Name: Economics of Development Spring 2006 Exam 1, February 28 Total quiz is 30 points. Each question is worth three points. Each sub question is worth an equal share of these three points. 1) Circle to indicate whether the statement is true or false. Statement Solow s model provides an explanation for the underlying forces that drive technological progress. The United States provides ODA as a share of national income at a rate higher than the UN guideline of 0.7%. The commitment problem focuses on whether promises made ex ante will be honored ex post by a self-interested agent. Prebisch found that a price index of primary products increased more rapidly than a price index of manufactured commodities. An overvalued exchange rate makes products produced in a given country less competitive on export markets. A country with present value debt worth 200% of the annual value of exports from this country is categorized by the HIPC program as having a sustainable level of debt. The Lewis model explains how a largely agrarian economy can develop an industrial sector by absorbing surplus labor from the agricultural sector. The O-ring model is based on the idea of strong complementarities in production. The Harrod Domar model is based on the idea of diminishing marginal returns to capital. Is the statement?

2 2) Growth theories. a. This is the graph of the equilibrium in the Solow model, with output per worker on the y axis and capital per worker on the x axis. Identify the steady state equilibrium level of capital per worker: with s and f(k) by noting where k * lies on the x axis; if s increases to s by noting where k * s lies ; if f(k) changes to f (k) by noting where k * f lies f(k) s*f(k) (d+n)*k s'*f(k) f'(k) s*f'(k) b. Which type of change, s to s or f(k) to f (k) did Solow identify as offering the promise of sustained growth in income over time? (Explain your answer) c. Explain the forces in this model that would lead a country with an initial stock of capital per worker value of 49 to move to a lower level of capital stock per worker value in steady state.

3 3) In the land of McPeakia, one worker can produce either five tomatoes per day or three hammers per day. In neighboring Johnovia, one worker can produce either two tomatoes per day or two hammers per day. a) Write out the two production functions for each good in each of the two countries with output as a function of labor. Tomatoes Hammers McPeakia Johnovia b) If there are 100 laborers in McPeakia and 100 in Johnovia, describe the level of production of each commodity in each country in autarky if they divide up their labor force with 50 workers allocated to each commodity in each country. McPeakia Johnovia TOTAL Tomatoes Hammers c) Identify the commodity for which each country has a comparative advantage. d) Illustrate by reallocating laborers between the two products how it is possible to increase total production of the two goods. Tomatoes Hammers McPeakia Johnovia NEW TOTAL

4 4) Sen in the reader argued there were four main themes in the first generation of development economics. Circle from this list the four he identified. a. Planning and an economically active state. b. Control of population growth through family planning. c. Focus on determinants of total factor productivity growth. d. Mobilization of underemployed labor. e. Development of transportation networks. f. Rapid capital accumulation. g. Industrialization. h. Importance of role played by guilds and unions. i. Development as freedom j. Preventing fragile states from failing.

5 5) Match the model / theory to the assumption or implication. Model 1) Stages of Growth Write the number of the model Assumption or implication Technological progress can be explained as a function of the economywide average capital stock 2) Romer growth Profits obtained in the manufacturing sector will be reinvested in this sector, thus increasing capital stocks and generating more employment. 3) O-ring Modern manufacturing is characterized by increasing returns to scale while traditional manufacturing is characterized by constant returns to scale. 4) Big Push Higher quality workers will choose to work with other higher quality workers, leaving lower quality workers to work together. 5) Lewis model Primary product exporting economies will experience unfavorable changes in their commodity terms of trade over time due income elasticities of demand. 6) Comparative Advantage Net investment increases to over 10% in the takeoff stage. 7) Infant industry Well being can be improved by specialization and trade without using any new resources. 8) Prebish Singer Firms will lower their costs of production over time as they learn by doing, thus making the need for protection temporary.

6 ) Illustrate the following: a. The impact of a tariff placed on the imported good. Show the level of domestic supply, the level of international supply, and the tax revenue generated. Y axis is price, x axis is quantity Demand Domestic Supply International Supply b. The impact of an overvalued currency, where demand is for foreign exchange, supply is of foreign exchange, the y axis records the price per unit of foreign exchange in terms of the domestic currency, and the x axis records the quantity of foreign exchange. Be sure to note whether we have excess supply or excess demand Demand Supply 4 2 0

7 7) The Poverty Reduction Strategy as defined by the World Bank has four core principles. Circle them from the list below. a) The strategy is aimed at allocating aid to those who show a commitment to ruling justly, promoting economic freedom, and investing in people. b) The strategy is partnership oriented coordinating participation of bilateral, multilateral, NGO, government, and civil society institutions. c) The strategy is country driven and participatory. d) The strategy should include tax reform that broadens the tax burden but lowers the taxation rates. e) The strategy involves deregulation to abolish barriers to entry and exit. f) The strategy is medium to long term in perspective. g) The strategy is comprehensive and results-oriented, and focuses on outcomes that will benefit the poor. h) The strategy is based on the idea that integrated rural development will lead to the realization of the millennium development goals.

8 8) There are four workers in the economy: worker one is q=0.8, worker two is q=0.6, worker three is q=0.4, and worker four is q=0.2. Production takes place using two workers, with output of combining workers i and j defined by y q q. ij i j a) Fill in the following Combination 1 Resulting output 1 Combination 2 (0.8, 0.6) (0.4, 0.2) (0.8, 0.2) (0.6, 0.4) (0.8,0.4) (0.6,0.2) Resulting output 2 Total ouput (1+2) b) Say production can be increased by paying for training that will increase the q of a given worker. The cost of this training, c, can be expressed in terms of output y. Training that costs c raises the skills of a worker by 0.1. As you may recall from class, training will be given to the lower q worker in a given pair. a. If the cost of training is below what level of c will a firm decide to pay for increasing the skill level of the 0.6 worker in a (0.8,0.6) pairing? b. If the cost of training is below what level of c will a firm decide to pay for increasing the skill level of the 0.2 worker in a (0.4,0.2) pairing?

9 9) Debt crisis. a. Describe the role played by US monetary policy following the second oil price shock in the debt crisis. b. Answer the following Statement Debt relief in the 1980s was made conditional on countries developing participatory poverty reduction strategies. Debt for equity swaps were one of the tools used to reduce debt burdens and encourage privatization of state owned industries. Debt relief was conditional upon opening up the economy and encouraging foreign direct investment inflows. Debt relief was designed to allow countries to move from an outward looking to an inward looking development strategy. Is the statement?

10 10) Production functions. a. Circle the correct answer: The concept is characterized by returns to scale. Returns to scale Manufacturing sector in big push Increasing Constant Decreasing Solow Growth model Increasing Constant Decreasing Cobb Douglas Production function Increasing Constant Decreasing Romer model Increasing Constant Decreasing b. Illustrate on the production function the impact of technological progress, with output on the y-axis and the input on the x-axis c. Illustrate using isoqants the impact of labor saving technological progress. d. Can a production function be characterized by constant returns to scale and diminishing marginal returns to an input at the same time? Why or why not.