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# ECONOMIC DEVELOPMENT ECON 4784

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This 3 page Study Guide was uploaded by Bridie Batz on Friday October 30, 2015. The Study Guide belongs to ECON 4784 at University of Colorado at Boulder taught by Ahmed Mobarak in Fall. Since its upload, it has received 42 views. For similar materials see /class/232131/econ-4784-university-of-colorado-at-boulder in Economcs at University of Colorado at Boulder.

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Date Created: 10/30/15

A Mushfiq Mobarak Econ 4784 7 University of Colorado Boulder Exam 1 Review Some Review Questions with Suggestive Answers 1 Draw the Lorenz Curve for the following two income distributions Economy A 102030140 Economy B 5 25 35 35 Order people from poorest to richest Each person represents 25 of the population So the cumulative proportion of population from poorest to richest 25 50 75 100 Convert each income value to of total income In economyA this becomes 510I570 In EconomyB 5 25 35 35 Calculate the cumulative of income going from poorest to richest EconomyA 5 15 30 100 Economy B 5 30 65 100 Plot cumulative of income on the vertical axis against cumulative of population on the horizontal axis Just based on the Lorenz curve is it possible to compare inequality for these two distributions Why or why not Yes it is possible Because the Lorenz curves do not cross 2 Is the population principle satis ed for the following measures of income inequality a Variance of Incomes b Distance from maximum income to median income c Coef cient of Variation of income Population Principle is satisfied for all 3 Z x 502 a The formula for variance is V H When you clone the population there are n twice as many identical terms in the numerator i e every term is repeated once So the summation in the numerator exactly doubles But cloning creates twice as many people so the denominator n also doubles Since the increases in the numerator and denominator are exactly proportional the variance doesn t change Intuitively the variance measures something like the average distance of all values from the mean or the dispersion from the mean Cloning the population wouldn t change this average distance b When you clone the population both the max income and the median income remain the same Coef of Variation is Standard deviation divided by mean From a above we saw that variance doesn t change so the std deviation which is the square root of variance doesn t change The mean doesn t change when you clone the population So Coef of Variation stays the same Q E Are the Relative Income Principle and the PigouDalton Transfer Principle satis ed for the above Relative Income Principle A Mushfiq Mobarak Econ 4784 7 University of Colorado Boulder Exam 1 Review a Not satisfied for Variance When you double incomes the distance of each value from the mean doubles which is to say that the terms inside the summation in the numerator xi x bar all double Since we re squaring each term the numerator quadruples The denominator n 7 number of people doesn t change so the variance quadruples b No When you double incomes the max doubles and the median doubles so their distance gets larger Yes RIP satisfied for Coef of Variation We saw above that the variance quadruples when you double incomes This implies that the std deviation doubles The mean also doubles when you double incomes So CoVstd devmean stays the same Q Transfer Principle a When you transfer incomes from a poorer to a richer person the average distance of incomes from the mean increases 7 so variance increases Since the variance uses information on the entire income distribution the change in the average distance from the mean due to a transfer is true of transfers between any two people So the transfer principle is satisfied b If you transfer income from the second richest person to the poorest person the measure doesn t change So the transfer principle is not satisfied c As we saw above when you transfer incomes the variance changes in the right direction and therefore the std deviation does too The mean stays the same due to a transfer So Coef of Variation changes in the right direction The principle is satisfied 4 Does the slope of the Lorenz curve increase or decrease as you move right Why Increases as you move right because we ve ordered people from poorest to richest from left to right The addition to cumulative of income when you add a richer person will be larger than the addition to cumulative of income when you add a poorer person 5 If we run a growth regression with Initial GDP per capita as one our explanatory variables what does the Solow model say we should expect for the coef cient of Initial GDP per capita What does the HarrodDomar model say that we should expect We re running a regression like this Growth from 1980 to I 990 a bGDPpc in I 980 cother explanatory variables The Solow model says that poorer countries grow faster This means that if Initial GDP per capita is lower then growth should be higher In other words we expect b to be negative The H arrod Domar model says that the growth rate depends on the savings rate productivity of capital and depreciation rate I f these are constant across rich and poor countries then the growth rates across rich and poor countries should be similar In other words there s no relationship between initial GDP per capita and subsequent growth rates so we expect b to be 0 A Mushfiq Mobarak Econ 4784 7 University of Colorado Boulder Exam 1 Review 6 gt1 9 What does the Solow growth model predict about longterm growth rates in countries What does the HarrodDomar model predict What aspect of or assumption in the Solow model sets it apart from the HarrodDomar model and allows us to get these different predictions What is the intuition behind why this difference in assumptions changes the models predictions Solow long term growth rates are zero H arrod Domar long term growth rates are given by gst97 5 so it depends on the savings rate capital productivity and depreciation and is generally positive or at least non zero Short answer to why we get the difference in prediction H D assumes a constant returns to scale production function while Solow assumes a decreasing returns to scale production function Look in your notes to figure out what this means and what the intuition is for why the model s predictions are so di erent based on the difference in assumptions What are possible responses of a country s citizens to rising income inequality What factors determine which type of response is likely to be observed This is the tra c jam analogy we discussed in class People can either get frustrated and revolt due to the rising inequality or they see other people in the country getting richer as a sign that bodes well for their own future income prospects Look at your notes to figure out what factors we discussed in class leads to one response being more likely than the other I stressed the role of ethnic fractionalization List a few important components of development and discuss why they are important in studying the economics of development You may want to relate your discussion back to the de nition of development given on the first day of class This is an easy question Look at your notes from the first two days of class We talked about inequality stability health education institutions political freedoms etc

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