Study Guide for Test 1
Study Guide for Test 1 ECN 201 10
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This 7 page Study Guide was uploaded by Stephanie Scott on Thursday September 22, 2016. The Study Guide belongs to ECN 201 10 at Washington College taught by Dr. Daniels in Fall 2016. Since its upload, it has received 115 views. For similar materials see Economic Development in Economics at Washington College.
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Date Created: 09/22/16
Introduction to Economics of Development Kuznets research on characteristics of rich countries Economic growth= long term rise in capacity to supply increasingly diverse economic goods to its population 1. Tech 2. Institutional Adjustments 3. Ideological Adjustments technological improvements alone do not result in overall growth, it requires the other two characteristics in tandem, all are interrelated epochal innovations=major breakthroughs in human knowledge domestic sustained growth in most of the world comes from innovation and incorporation of that innovation those with epochsmost of Europe (Western) and Western Europe Offshoots (US, Canada), Japan o these countries account for ¼ of the world’s population The 6 Characteristics: 1. High per capita growth rates, high population growth rates 2. Rise in productivity (including inputs of labor) 3. High rate of structural transformation a. For example: rapid shift away from agriculture into industry and then services 4. Rapid change in societal structure and ideology (modernization) 5. Global reach via technology (transportation and communication allowing for international trade/interaction) 6. Spread of modern economic growth mostly limited to already modernized states Characteristics are 2 aggregate rates, 2 structural transformations, and 2 international spreads All advanced nations (excluding Japan and Russia) were already well advanced (in global comparison) before industrialization occurred o The path to modernization for countries now is the same as before only accelerated Without a stable ratio of labor force to total population and an increased rate of per capita product, there is no change in locations for work (ag to industry.) and now change in institutional and ideological structures Use of technology must be widespread and massive, meaning technological growth and pursuit of higher knowledge is necessary Some Implications: Technological advance causes urbanization and more migration to cities Change in living conditions (urbanization) is the cost of moving and learning new technological skills o Generally live in squalid conditions until employed and able to move from slums Structural change becomes difficult if it doesn’t happen smoothly; an excess of population living in slums with no hope of leaving can result in class conflicts and civil war conditions o Conflicts need to be resolved at a low cost to the state, it needs to create a legal framework to protect new production potential o If the cost of staving off war is too high then the government can’t devote money to improving infrastructure and institutions, which would alleviate the clash issues in the long run There are always negative aspects to technological growth, but this is only a true problem if the issues outweigh the benefits of the growth and are ignored by the government o For example; if the government ignores the environmental effects the longterm impact on general health and resources could reduce efficiency Less Developed Countries: Colonial policies limiting political freedom and reducing trade prohibit economic and industrial development Imperial exploitation, backward nativeness, all limiting factors to growth 2/3 of the world pop lives in LDCs LDCs can vary greatly in resources, institutions, and past with DC’s, and their societies can be drastically different o All share low per capita production, are mostly agricultural, and have small scale production Perkins et al identification of factors that led to wealth 1. Emphasis on education 2. Highly developed systems of commerce, finance, and transport run by local business, not controlled by foreign firms 3. Common language, culture, and sense of identitypresent in wealthy countries, in contrast the developing world has lots of arbitrarily drawn borders made by colonial powers that have created heterogeneous populations 4. Selfgovernmentpoor countries have no experience because colonialism always provided their framework Adam Smith’s findings from “Wealth of Nations” Specializations and exchange, do what you’re good at competition large # of buyers and sellers, low entry/exit barriers, homogeneous goods, firms are ‘pricetakers’, zero economic profit, perfect information availability free trade the invisible hand by trying to maximize own gains, individual ambition benefits society even if the ambitions are without benevolent intentions gov. investment in transportation and education capital (tools of production) accumulation through saving Four strands of thought since the 1950s 1. Linear Stage: IMF and Bretton Woods (50’s60’s) a. Development is a process/series of stages (agriculturesurplusinstitutionstradeinternational b. All countries MUST pass through each stage, need right mix of saving, investment, and foreign aid to speed up the development process c. Need structural, institutional, and attitudinal conditions to shift i. Money markets, transportation, trustworthy bank and currency, educated workforce, efficient government 2. Structural Change Theory (50’s) a. 2 sectors, traditional and urban sector i. labor moves from agricultural to industrial b. strategy used in this theory was to transfer technology and capital from developed countries to poorer countries i. this strategy assumes there is surplus labor in rural areas and employment in urban areas, meaning that people will be motivated to move and can immediately get to work ii. unfortunately for this strategy there was not a surplus of jobs immediately available because the industries that would need workers did not yet exist iii. this strategy didn’t work because they also needed skilled workers to operate the new machinery (transferred from rich countries) in order to produce a surplus (which would allow people to move to the cities) iv. without a surplus labor is not cheap, so baby industries can’t hire 3. International Dependency Theory (70’s) a. Stated that underdevelopment was a result of historical evolution of a highly unequal international capitalist system i. Basically blamed underdevelopment on the remnants of colonialism and the institutions that were created to benefit the colonizing country ii. These states were still in trade agreements with their ‘mother countries’ that were very uneven despite the fact that they were now independent countries 4. National Counter Revolution: Market Fundamentalism (80’) a. Stipulated that poverty is a result of the heavy hand of the state in the economy, and corruption, inefficiency, and lack of economic incentives keep government intervention from actually helping b. To fix this, the globe needed to promote free markets, privatization, and free trade with minimal barriers and government intervention i. Competition would increase efficiency and increased profits would motivate the government to take more steps to stimulate trade Chapter 1 Traditional and new view of development Traditional View: Came from PostWW2 era Traditional view=capacity of national economy to generate and sustain annual income growth (GNI) Rate expected to maintain for growth around 57% (which we now know is very high actually) In comparison, wealthy countries today grow more slowly, US at 24% New View: Overall Development is Multidimensional Need major changes in social structures, attitudes, institutions, econ growth, and reduction in inequality, eradication of poverty to have sustainable growth Millennium Development Goals (including topics from film – use handout with questions) (2000) UN goals setting targets for 2015 (all 189 member countries in agreement) Results? There’s no real clear pattern of where countries succeeded or failed Those recording the data in each country are not necessarily unbiased No one is in charge of making sure they’re accomplished so no one is accountable to accomplish them According to the filmthe world has the resources and the money to accomplish these goals but governments and people lack the political will to accomplish them; can’t see that in long run growth benefits all Is Development Economics a separate field? (Traditional, political, development, institutional economics) Traditional Economics: Economics= allocation of scarce resources Focus is on perfect markets with ideal circumstances The economics we learn in macro and micro classes Political Economics: Social and institutional processes through which certain groups of economic and political beliefs influence the allocation of scarce resources Things aren’t allocated perfectly in real life, and richer people have greater influence on the system than the poor Development Economics Allocation of scarce resources Not just focused on maximizing efficiency/profits, must first create markets in poor countries Deals with economic, social, political, and institutional mechanisms necessary to bring about rapid improvements in the levels of living o Similar in this way to political economy o Focus: how to improve these things rapidly o Political economics applied to the issue of poverty Concedes that markets are imperfect and there is limited information Challenge of combating social norms o For example: some societies find it socially acceptable to use bribes to get out of tickets Institutional Economics: Institution= formal rules and informal habits Institutional econ is the study of institutions and how they frame, constrain, enable, and evolve over time o Informal norm= what is considered socially acceptable, even if not strictly legal Ex: social acceptability of public smoking now compared to the 70’s o These rules and habits change at different paces in each country Douglass North (development field failure, what shapes economic performance, why rules in one economy won’t work in another) Same as the reason that we should study development and not traditional economics o Normal econ is only about market processes, not how these processes develop and change o Can’t transplant solutions from one country to another because they have different norms Economist Article – Towards the End of Poverty What is the source of poverty reduction? 2/3 of poverty reduction was a result of economic growth in developed countries (increase in GDP) and 1/3 was a result of reducing inequality What will happen to poverty reduction in the future. Will it grow at the same pace? 22% of the population pulled out of extreme poverty was the group of people right at the cusp of the poverty line, remainder are far below that line in terms of income and living standards countries like India and in Africa have the potential to mirror the growth seen in China, however they will require more concerted efforts due to less developed governments and infrastructure. What policies will help with poverty reduction free market policies and lowering trade barriers domestically and abroad to encourage investment targeted policies like social safety nets and cash transfers will also aid in poverty reduction by limiting the growth of income inequality as people disproportionately benefit from free trade developed countries like the US need to play along and reduce subsidies for agriculture to allow developing countries to enter the market Have the Millennium Development Goals been met? They have and haven’t in no particular pattern No one country succeeded in every category regardless of level of development Chapter 2 GNP, GDP, GNI, Value added Corrections – Exchange rate and PPP GNP/GDP/GNI= value of entire income of a country, the total market value of final goods and services produced within a country/economy They’re usually measured annually or semiannually Citizens Noncitizens Citizens Income from Payments to within the within the abroad other other country country countries countries (interest and (interest and dividends) dividends) GDP X X GNP X X GNI X X X X GDP is production within borders whether person is a citizen or not, GNP is only national citizens within borders Value Added=used in the Income Approach for measuring GDP, the increase in price of a good at each stage of production Each level/group needs to raise the price in order to pay for the land, labor, and capital they expended during the process, as well as the initial material price (X) o For Example: farmers sell to a Cooperative at price X, the Cooperative then sells to the Factory at price X+1 to account for the cleaning and processing they do to add value to the product. The Factory then sells the good at price X+2 to a Retailer, who then sells the good at price X+3 to the consumer. Each increase in price is a result of value added Flaws of GDP/How to deal 1. GDP doesn’t incorporate PPP PPP= purchasing power parity, GNI calculation taking cost of living into account for comparing living standards When not included, GDP hugely exaggerates income inequality Based off the “Big Mac Index”, comparing prices of identical goods in various countries o Ex: the US gdp per capita is 10 times that of India, but the US GDP per capita with PPP incorporated shows that US is only 3 times that of India Calculated by “market basket” o Set of goods that are equal in quality globally o Difference in cost of market basket goods is the ratio for PPP between countries Social indicators 2. GDP does not incorporate social indicators a. Does not measure life expectancy, rate of undernourishment, mortality before age 5, adult literacy b. Correlation of indicators with GDP i. A correlation exists between life expectancy and GDP but there is no clear correlation between literacy and GDP Composite indices 3. The Human Development Index (HDI, 2000) is the UN development Program’s way to rank nations based off of three indexes: a. Life Expectancy: calculated by (current expectancy 25)/ (8525) i. 85 is the ‘maximum reasonable’ expectancy ii. no diminishing marginal utility is assumed when calculating life expectancy b. Education Index: 2/3(Adult Literacy Index) + 1/3(gross enrollment index) i. calculated by dividing country percentage for Adult Literacy by 100 (decimal of given percentage) ii. Gross Enrollment Index: calculated by dividing the country’s percentage for gross enrollment by 100 c. Income Index: calculated by dividing the national income by the population number d. HDI = 1/3(Income Index) + 1/3(Life Expectancy) + 1/3 (education Index) Eight different initial conditions 1. Physical and human resource endowments are not the same a. Hong Kong and Japan succeeded without the same natural resources as a place like Great Britain 2. Relative levels of per capita income and GDP to other countries of the time period are not the same a. Great Britain during the industrial revolution was on top economically, whereas countries going through their own industrial revolution are far behind the rest of the world 3. Climatic Differences a. Poorer nearer to the equator, there are lower levels of productivity because climate conditions create huge forests, which makes for terrible farming soil (throwback to environmental science) 4. Population Size, Distribution, and Growth a. The wealthy countries of today never had to deal with a population growth rate of over 2%, whereas today’s developing countries have to expand rapidly in every way to keep up with their population 5. Historical Role of Internal Migration a. Historically people could move and find jobs relatively nearby, now it is harder to move to available jobs for those without skills because they are generally across borders b. Another issue is talented labor may just move to alreadydeveloped countries rather than stay and improve their home country, this phenomenon is called brain drain 6. Growth Stimulus of International Trade a. There are tariffs in markets where developing nations desperately need access (textiles and agriculture) as well as quotas and subsidies created by now wealthy countries that are barriers to trade 7. Scientific and Technological R and D Capabilities a. They can import technology but if they don’t also build up education and support science and tech R&D they will always be playing catchup to DC’s, not running equal to them b. Most technology exists today because a DC needed to solve a problem, and these problems don’t necessarily exist in LDC’s so the technology isn’t as useful or as transplantable 8. Efficiency of Domestic Institutions a. Reduction in corruption of government officials and police is necessary and the government needs to stabilize b. This is difficult for LDC’s that were colonized; their entire previous government system was based on benefitting another country (often through pitting different social groups against each other) so often inequality and inefficiency are built into existing systems Chapter 5 How to measure inequality Data comes from income tax forms Difficulties of data collection Census use of enumeration areas (100 households) and data collected by going door to door Sometimes weather is not so helpful (monsoons and earthquakes mess up roads) Sometimes people live out in the boonies and the government doesn’t even know they’re there Lorenz curve generally viewed as a cumulative measure graph created using a data set ordered lowest income to greatest, result is that each cumulative measure gets exponentially bigger due to income disparity o for example, if the bottom 10% of the population’s income added up to 1.8% (of total income), and the next 10% of the population’s income was 3.2%, then the cumulative measure of the bottom 20% of the population is 5% Gini coefficient the Gini Coefficient is the difference between the line of equality and the line depicting national income the distance between the two lines demonstrates the inequality of a country formula for calculation is A/(A+B) numbers range from 01 with 1 being perfectly unequal being one of the most developed nations does not mean having a low Gini Coef. (US has Gini Coef of . 43) there is no overarching pattern globally for what countries are the most/least equal http://2.bp.blogspot.com/m9L_vRsUCeo/TbOeI3iIncI/AAAAAAAAACo/1g25I_9m_Us/s1600/Map+16.jpg
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