Mid-Term Fall (4 points) Modern Economic Growth and Political Independence.

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1 Economics 315 Betancourt Mid-Term Fall 1998 I. (16 points) Define each of the following terms and indicate how they help understand an aspect of the development process by themselves or in connection with the additional term next to it. 1. (4 points) Modern Economic Growth and Political Independence. 2. (2 points) Backward Linkages. 3. (4 points) The Inverted -U or Kutznets Curve and the Labor Surplus Model. 4. (2 points) The Changing Structure of Output. 5. (4 points) Institutions and External Economies. II. (14 points) 1. (3 points) In Etherland nominal GDP grew by 14% per year between 1980 and a. If inflation was 4% during this period, what was the annual rate of growth of real GDP during this period? b. If GDI/GDP (gross domestic investment/ gross domestic product) was 20%, what was the incremental capital output ratio in Etherland? c. The next 10 years in Etherland will require a great deal of investment in ports, roads and power generation facilities to alleviate the congestion in existing facilities, will the incremental capital output ratio go up or down and why? 2. (2 points) Consider the following information on gross domestic product per capita (GDP/POP) in the U.S, India and Japan. U. S. India Japan GDP/POP ($ at official exchange rates) 20, ,000 GDP/POP ($ at purchasing power 20, ,000 parity rates)

2 a. Which of these two rows of figures should be used for comparisons across countries and why? b. Why is Japan s GDP/POP lower in the second row than in the first while India s GDP/POP is higher in the second row than in the first? 3. (3 points) Consider the following information on growth rates in Kazak and Ubekia. Kazak Ubekia g Y 4.6% g L 2% 2% g K 8% 4% a 0.5% 1.8% w L w K Where g represents the rate of growth and the subscript indicates the item that is growing ( namely, Y is real GDP, L is the labor force and K is the capital stock); and w represents the share in GDP of a particular factor (namely, the subscript L is labor and K is capital). a. Calculate the rate of growth of real GDP in Kazak. b. Give two reasons why Kazak s growth pattern resembles that of a developing country. 4. (3 points) Consider a country with three households with the following distribution of household per capita income (y) in 1990, measured in dinars of constant value. Call it Irascia. It also has the following ditribution of household size, n.total household income is HI. y (1990) n (1990) HI(1990) A B C The poverty line is 100 real dinars per person in a. What is the percentage of society s total household income accruing to the bottom 40 %

3 of the population in b. What is the head count ratio in 1990? What is the average income of the poor in 1990? c. Indicate two dimensions of human welfare that are missing from the above discussion according to the human development index put out by the United Nations. 5. (3 points) In 1985 Pondia imported 100 car seats, which were sold at a price of 200 gidgets per car seat. In 1995, after implementing an import ban, Pondia imported no car seats but produced 80 domestically, which sold at a price of 400 gidgets per car seat. There has been no inflation and no devaluation in Pondia. A gidget is worth the same in terms of dollars in the two periods. The demand for car seats has not changed. a. Draw a diagram showing the car seat market equilibrium in 1985 (call it E) and in 1995 (call it G). Label the horizontal axis Q, the vertical one p, the 1985 supply curve S, and the 1995 supply curve S. b. What are the potential rents per car seat for smugglers in 1995 when a smuggled car seat costs 300 gidgets ( including any bribes to custom officials)? c. Will custom officials try to increase their bribe payment prices? Why or Why not?

4 Economics 315 Betancourt Final Exam Fall 98 I. (8 points) Define each term and indicate how it helps understand an aspect of the development process by itself or in connection with the term next to it, if any. 1. (4 points) Institutions and External Economies. 2. (2 points) Engel s Law. 3. (2 points) Rents. II. (7 points) 1. You are given the following information on the country of Panzania Nominal GDP ($) 1,000 16,000 Head count ratio (% ) Share of income of bottom 40% (%) Life Expectancy (years) ICOR (Ratio) 4 3 Productivity Growth (%) a. Calculate the annual rate of growth of nominal GDP. b. If the annual rate of inflation between 1970 and 1990 was 3 %, what was the annual rate of growth of real GDP in Panzania during this period? c. What would be the saving rate in 1990, according to the Harrod-Domar model? d. What part of the annual rate of growth of real GDP in 1990 is due to the growth of factor inputs such as capital and labor, according to the sources of growth analysis? e. What happened to inequality during this period, indicate your measure of this concept? f. What happened to poverty during this period, indicate your measure of this concept? g. Was growth equitable in Panzania? Why or why not?

5 III. (24 points) Define each term and indicate how it helps understand an aspect of the development process by itself or in connection with the term next to it, if any. 1. Factor Price Distortions and Elasticity Optimists. 2. The Functions of a Financial System. 3. Benefits of Foreign Direct Investment. 4. Permanent Income Hypothesis. 5. Primary Exports as an Engine of Growth. 6. Modern Theories of Fertility. IV. (21 points) 1. (6 points) In Cartusia the rate of inflation averaged 5% between 1980 and 1995, the lending rate over this period averaged 8 %, the ratio of money supply to GDP was 40 in 1980 and 50 in a. Calculate the real rate of interest during this period. b. Use the information presented to identify and explain the financial strategy followed by Bovenia. c. Real GDP is expected to grow at 5% between 1995 and 2000, the income elasticity of the demand for money is 0.8; if the money supply is increased by 10% during this period, what would you expect the rate of inflation to be during the period? 2. (6 points) In Pirenia the following changes took place between 1980 and GDI/GDP GDS/GDP Government Savings/GDP 3 4 Government Capital Expenditure/GDP 5 3 a. Calculate foreign savings/gdp or net resource flow/gdp in 1980 and in b. Calculate private savings/gdp in 1980 and in 1995.

6 c. (2 points) Identify one specific type of net resource flow in Pirenia in 1980 and a different one in 1995? d. (2points) What is implied by the fact that government capital expenditures exceed government savings in 1980? What is implied by the reverse situation in 1995? 3. (5 points) In Neverland a foreign company finds uranium deposits in Initially, the equilibrium exchange rate was 4 bahts to the dollar. Neverland exported bananas and produced maize for domestic consumption. a.(2 points) If the government receives substantial royalties in $ from the uranium exported during 1996: i) use a diagram with $ in the horizontal axis and kronars/$ on the vertical one to describe what will happen to equilibrium exchange rate under a flexible exchange rate regime. ii) how will the money supply be affected if the official exchange rate remains fixed at 4 bahts/$. b. (3 points) After allowing the exchange rate to attain a new equilibrium value, the government adopts a fixed exchange rate policy during World prices increase by 5% in 1997; Domestic prices increase by 50% in 1997: i)letting the nominal exchange rate index in 1997 = 100, calculate the real exchange rate index in ii) Will exporters of bananas export more or less in 1997 than in 1996 and why? iii) What could have caused the increase in domestic prices during 1997? 4. (4 points) In Shangri-La rural urban migration has been taking place rapidly. In a recent year, the urban wage was 2,000 rupiahs; the rural wage was 1,000 rupiahs and the unemployment rate in the urban areas was 20%. a) Calculate the expected urban wage that year. b) If the migration response function has a coefficient of.2, how many migrants will move to the urban areas. c) Are most migrants young or old? What is the economic reason for this pattern? d) Are most migrants educated or uneducated? What is the economic reason for this pattern?