ECON 121 Midterm Review

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Questions and Answers

What is primarily indicated by a stabilization in population growth rates in a country?

An increase in unemployment rates

A rise in death rates

An increase in fertility rates

Significant technological advancement and resource allocation (correct)

What measures can be taken to delay population momentum effectively?

Increasing birth rates

Limiting access to education

Encouraging early marriages

Providing more job opportunities for women (correct)

In the Malthusian Population Trap, what is the main consequence of rising population paired with diminishing resource returns?

Stable economic growth

Increased standards of living

Sustained population growth

A decline in the standard of living (correct)

What characterizes the demographic transition when a nation experiences falling birth and death rates?

Greater economic participation and productivity Signup and view all the answers

What does the point labeled T in the Malthusian Population Trap signify in the context of population growth and resources?

The onset of famine and conflict Signup and view all the answers

How does the income effect relate to fertility decisions in low-income societies?

Children are valued for their economic contributions, increasing demand as income levels rise. Signup and view all the answers

What outcome is likely when families experience increased bargaining power for women?

Lower fertility rates as women's preferences shift towards other goods. Signup and view all the answers

Which of the following factors does NOT contribute to lower fertility rates according to the theory?

Higher costs of quality education. Signup and view all the answers

What does the substitution effect indicate about children's demand in relation to other goods?

Families may choose to have fewer children when the cost of raising children exceeds the cost of luxuries. Signup and view all the answers

Which statement best summarizes the overall relationship between education and fertility rates?

Increased education leads to lower fertility rates and more quality investments in children. Signup and view all the answers

What combined indices make up the Traditional Human Development Index (THDI)?

Income Index, Life Expectancy, and Education Signup and view all the answers

What factor contributes to the potential for economic convergence among nations?

Diminishing returns to capital and diffusion of ideas Signup and view all the answers

Which statement about economic institutions is NOT accurate?

Good institutions have no impact on long-term economic growth. Signup and view all the answers

What effect does having a zero value in any component of the New Human Development Index (NHDI) have?

It results in an overall NHDI score of zero. Signup and view all the answers

Which of the following statements best reflects the relationship between policy and development?

Effective policy can create necessary conditions for development. Signup and view all the answers

Which key factor is necessary to increase economic growth according to the Harrod-Domar Growth Model?

Capital-output ratio Signup and view all the answers

What is considered a major criticism of the Linear-stages-of-growth model?

It assumes all economies will follow the same stages uniformly. Signup and view all the answers

In the Lewis Two-Sector Model, what is the presumed relationship between traditional sector wages and average product?

Traditional sector wages are equal to average product. Signup and view all the answers

What aspect of growth does the criticism of the Stages Model highlight about savings and investment?

They are necessary but not sufficient alone for growth. Signup and view all the answers

What is a critical element that the Lewis Model overlooks regarding labor surplus?

Resource limitations for labor productivity enhancement. Signup and view all the answers

Which of the following challenges the effectiveness of foreign advisors using developed-country models in the context of economic development?

They misapply developed-country models, leading to ineffective solutions. Signup and view all the answers

What does the Solow General Growth Model indicate about the relationship between capital growth and diminishing returns?

Diminishing returns on capital imply output growth will decrease as more capital is added. Signup and view all the answers

Which statement correctly describes the concept of Constant Returns to Scale in economic growth?

When capital and labor are doubled, output also doubles. Signup and view all the answers

According to the concepts of market fundamentalism, what is a criticism of government intervention in economies?

Intervention can fail to address market needs effectively. Signup and view all the answers

What is a key limitation of the dependency theory regarding international relations and development?

Empirical evidence has contradicted claims made by dependency theorists. Signup and view all the answers

What does the S-shaped function known as the 'Private Rational Decision Function' primarily illustrate?

How economic agents respond to their external environment based on expectations. Signup and view all the answers

In the context of the Big Push Theory, which of the following statements is accurate?

Higher equilibrium points cannot be achieved without effective leadership. Signup and view all the answers

What is the primary consequence of pecuniary externalities in a fragmented economy?

They create a situation where industries wait for each other to act, leading to stagnation. Signup and view all the answers

What is primarily needed to overcome the coordination failures highlighted by development economists?

Incentives that encourage collaboration and simultaneous action among sectors. Signup and view all the answers

Which scenario best demonstrates the concept of coordination failure as discussed in economic development?

The automobile industry separately invests in growth without regard for the steel sector. Signup and view all the answers

What is a significant consequence of the bottleneck effect in skill investments?

It lowers the overall skill level and disincentivizes further investment. Signup and view all the answers

Kremer’s O-Ring theory implies that productivity is predominantly determined by which of the following?

The strong complementarities among input qualities within production. Signup and view all the answers

What challenge does the Big Push Mechanism face when attempting to drive economic growth?

It is limited by high fixed costs that deter potential entrants. Signup and view all the answers

How does a lack of empirical evidence challenge the concept of a 'Super- Entrepreneur'?

It suggests that entrepreneurial success cannot be replicated universally. Signup and view all the answers

In the context of multiple equilibria, what does incumbency provide that can become inefficient?

Established networks that resist innovation and change. Signup and view all the answers

What does the presence of significant congestion indicate in terms of economic constraints?

It signifies problems with infrastructure. Signup and view all the answers

In the context of binding constraints, what should be expected if education is a primary issue?

High rates of return to education. Signup and view all the answers

How does 'economic detective work' contribute to identifying binding constraints?

It involves research into the implications of various economic behaviors. Signup and view all the answers

Which scenario most accurately reflects the consequences of a binding constraint?

High opportunity cost associated with the constraint. Signup and view all the answers

What can be inferred if agents in an economy are attempting to bypass a specific constraint?

The constraint is a major barrier to economic growth. Signup and view all the answers

Which property ensures that measures of inequality do not depend on the size of the economy?

Scale independence Signup and view all the answers

In the context of the Gini coefficient, what does the area BCD represent?

The total area that includes both inequality and equality Signup and view all the answers

Which principle states that inequality measures should only account for the incomes of the poor?

Focus Principle Signup and view all the answers

What does the Kuznets Inverted-U Hypothesis suggest about income inequality during economic growth?

Income inequality initially increases before decreasing over time Signup and view all the answers

Which of the following principles addresses the impact of transferring income from a richer to a poorer individual?

Transfer Principle Signup and view all the answers

What is the implication of agencies focusing on headcount measures when tasked with poverty reduction?

It encourages reporting based solely on favorable numerical results. Signup and view all the answers

In the Foster-Greer-Thorbecke (FGT) Index, what happens when the parameter 'a' is set to 2?

It indicates a comprehensive view of poverty severity. Signup and view all the answers

What does the Total Poverty Gap (TPG) formula primarily measure?

The aggregated shortfall of income from the poverty line. Signup and view all the answers

What is a significant limitation of using the headcount index in assessing poverty?

It lacks the ability to measure depth or severity of poverty. Signup and view all the answers

Why might Microfinance Institutions (MFIs) focus on assisting individuals who are less poor on average?

They prioritize those who have a higher potential for successful loans. Signup and view all the answers

What are the key components that define development in an economic context?

The key components that define development are real income, life expectancy, and education. Signup and view all the answers

How can growth in per capita income occur without improvements in life expectancy and education?

Growth in per capita income can occur through wealth concentration within a specific income class, benefiting only a small segment of the population. Signup and view all the answers

What distinguishes development economics from traditional economics in terms of measurement?

Development economics considers qualitative factors such as education, life expectancy, and quality of life, in addition to quantitative measures like GDP and per capita income. Signup and view all the answers

Why do purchasing power parity measures show smaller income differences between poorer and richer countries?

Purchasing power parity measures account for differences in the cost of living, revealing greater purchasing power for basic necessities in poorer countries. Signup and view all the answers

How does colonial history impact current economic development in formerly colonized nations?

The legacy of colonialism affects economic development based on the type of colonial rule, influencing the establishment of social structures and institutions. Signup and view all the answers

How do Linear Stages of Growth interpret economic development compared to International Dependency Models?

Linear Stages suggest economies evolve through progressive phases, while International Dependency Models emphasize the hindrance of growth due to historical power dynamics and dependency relationships. Signup and view all the answers

What critical assumptions of the Lewis model impact its conclusions about labor dynamics?

The model assumes a dual economy with surplus labor in the traditional sector and higher wages in the modern sector, impacting growth projections if these assumptions fail. Signup and view all the answers

Define coordination failure and give an illustrative example relevant to industrial development.

Coordination failure occurs when economic agents do not synchronize actions, leading to inefficiencies, such as the steel sector waiting for the automobile sector to innovate before moving forward. Signup and view all the answers

Why is a 'one size fits all' approach to development policy deemed ineffective according to the Hausmann-Rodrik-Velasco framework?

This approach is ineffective due to diverse economic contexts, specific binding constraints, and the necessity for local knowledge in policymaking that varies by country. Signup and view all the answers

What is meant by 'investment in children' in the context of parental goals and methods?

'Investment in children' refers to parents' efforts to ensure children's education and well-being, typically emphasizing health, education, and skill development to empower future generations. Signup and view all the answers

Study Notes

Population Growth and Development

Less developed countries tend to have higher population growth rates.
Population growth stabilizes with development.
Most of the world's population is in Asia and the Pacific, while Europe and North America control most of the world's wealth.

Population Momentum

Even with lower fertility rates, high birth rates can persist due to a large number of women of childbearing age.
To reduce population momentum, delay pregnancies through economic opportunities, education, and career focus.

Demographic Transition

Nations shift from high birth and death rates to low birth and death rates as they develop.
More developed countries have more women in the workforce.
Stages of demographic transition include high birth and death rates, continued high birth rates with declining death rates, and falling birth rates and death rates, eventually reaching a stable point.

Population Dividends

Countries that invest in fewer people can experience greater returns in the form of savings, leading to a larger working-age population.
This allows for greater resources to be reinvested in the future.

Malthusian Population Trap

The theory that population growth can outpace resource availability, leading to poverty and subsistence levels.
Diminishing returns to fixed factors, such as land, can lead to declining living standards.
Population growth can expand in times of plenty but eventually hits a limit where it outstrips available resources.

Escaping the Population Trap

To avoid the Malthusian trap, increase technology and education.
Technological advancements increase productivity, allowing for higher outputs with fewer resources.
Development increases the opportunity cost of time, making people prioritize career over activities like cooking.
Indicators of development include higher incomes and the presence of fast-food chains, suggesting a higher demand for convenience and disposable income.

Microeconomics Household Theory of Fertility

Families make economic decisions about the number of children based on income, child-rearing costs, and preferences for other goods.
Income Effect: Higher income generally increases demand for children, who are considered normal goods. However, in low-income societies, children contribute economically through labor and future financial support.
Price Effect: The cost of raising children, including education and opportunity cost of a mother's time, influences family size. Affordable quality education can incentivize families to invest in quality over quantity.
Substitution Effect: When the price of children relative to other goods increases, families may substitute other goods for children, decreasing family size.
Bargaining Models: Household decisions are not unitary. Men and women may have different preferences, leading to bargaining. Increased female bargaining power, often through education and employment, can lead to lower fertility rates.
Empirical Evidence: Higher female education and employment opportunities correlate with lower fertility rates. Improved child survival rates also reduce the need for larger families to ensure a desired number of surviving children.

Demand Function for Children

There is a cost to having children. Families need sufficient resources to adequately provide for their needs.
Lower fertility is associated with:
- More female nonagricultural employment at higher wages.
- Increased women's education, role, and status.
- Expanded schooling opportunities with lower costs.
- Higher family income levels.
- Reduced infant mortality and better healthcare.
- Development of old-age and social security plans.

Holistic Measures of Living Levels and Capabilities

Income, Health - Life Expectancy, Education are crucial indicators of living standards and development.
Traditional Human Development Index (HDI) combines income, life expectancy, and education for a broader view of development.
New Human Development Index (NHDI) aims for a more comprehensive description of development by incorporating factors beyond income, health, and education.
Convergence refers to the tendency for living standards across countries to become increasingly similar over time.
The Great Divergence followed the industrial revolution, leading to significant differences in living standards between nations.

Reasons for (Re-)Convergence

Diminishing Returns to Capital: As countries invest more capital, the rate of return on investment tends to decline, potentially allowing for faster growth in less developed countries.
Diffusion of Ideas: Developed countries' knowledge and technology can spread to developing countries, enabling them to skip trial-and-error phases and grow quickly.
Convergence is not universally convincing: Differences in technology, education, and efficiency across economies may prevent or hinder convergence.

Nature and Role of Economic Institutions

Institutions set the "rules of the game" for economic activity, impacting development.
Key institutions include:
- Property Rights: Enforceable ownership rights drive investment.
- Contract Enforcement: Encouraging agreements and fair transactions.
- Anti-Competitive Behavior Restrictions: Promoting free and fair competition.
- Power-Constraining: Limiting abuse of power by elites.
- Conflict Management: Stabilizing the economy through conflict resolution.
Other institutions contribute to
- Improved coordination
- Social insurance
- Predictable macroeconomic stability
Strong institutions adapt to problems proactively, fostering development by mitigating economic risks and improving responsiveness.

Linear Stages of Growth Model

Multiple stages of growth with production prioritized before consumption.
How to determine a country's stage of growth is unclear.

Harrod–Domar Growth Model (AK Model)

Each country must save a portion of its national income to replace worn-out capital goods.
Increases in capital stock through investment result in corresponding increases in GDP flow.
Capital-output ratio denotes the required units of capital for a unit of output.
A lower capital output ratio signifies more efficient resource utilization.
Depreciation, represented by "δ," is considered in the model.

Criticisms of the Stages Model

Saving and investment are necessary but not sufficient for accelerated growth.
Other factors besides capital contribute to economic growth:
- Population size and growth.
- Sectoral transformations.
- Education and human capital.

Theories and Patterns of Structural Change

Lewis Two-Sector Models

Assumes surplus labor in traditional sectors, where wages equal average product.
Transfers labor from the traditional to modern urban sector, aiming to boost productivity and wages.

Criticisms of the Lewis Model

Inconsistencies with microeconomic principles:
- Wages should equal marginal product of labor for profit maximization.
- Resource limitations constrain efficiency.
- Lack of capital prevents individuals from implementing productivity improvements.
Rate of labor transfers and employment creation may not correlate to the rate of modern sector capital accumulation.
Assumes surplus labor in rural areas and full employment in urban settings.
Limitations of the model in considering institutional factors.

Empirical Patterns of Development

Common development trends include (not universally applicable):
- Shift from agriculture to industry.
- Rural-urban migration and urbanization.
- Accumulation of physical and human capital.
- Population growth followed by a decline, leading to smaller family sizes.

The International-Dependence Revolution

Power dynamics influence economic processes.

False-Paradigm Model

Criticisms of misapplied developed-country models by foreign advisors.

The Dualistic-Development Thesis

Coexistence of superior and inferior elements in economic systems.

Criticisms and Limitations

Growing number of counter-examples challenge the international-dependence revolution.
The framework lacks concrete strategies for achieving development.

Neoclassical, free market “counterrevolution”

Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches

Free market, public choice, and market-friendly approaches advocate for free markets and limited government intervention.

Main Arguments

Government intervention is inefficient.
State-owned enterprise failures are highlighted.
Government failures are emphasized.
Trust in the "magic of the marketplace" is encouraged.

Associated with the Solow model of governance.Traditional Neoclassical Growth Theory

Input interactions are crucial drivers of economic growth.

Solow General Growth Model

dY/Y: Output growth rate
dA/A: Technology growth rate
: Capital share
dK/K: Capital growth rate
(1- : Labor share
dN/N: Population growth rate
Constant Returns to Scale: If capital and labor double, output doubles.
Diminishing marginal productivity: Output increases with capital/labor growth, but at a decreasing rate.
Technology is crucial for economic growth and has no diminishing returns.

Solow Residual (dAA)

It is the unexplained portion of output growth after accounting for capital and labor inputs.
It represents technological advancement but lacks concrete definition or manipulation.

Solow Equilibrium Equation (sf(k) = (δ + n ) k)

sf(k*): Savings per worker
δk*: Capital per worker required to replace depreciated capital.
nk*: Capital per worker required for population growth.

Contributions and Limitations of the Four Schools

Capital Fundamentalism

Emphasizes the significance of investment and efficient capital allocation.
Investment is a necessary condition for growth but requires additional factors.

Structural/Empirical Patterns of Development

Empirical evidence helps remove theories from contention.
Data requires theoretical interpretation for effective policy-making.

Dependency

International relations, trade, and investment patterns can hinder development.
Counter-examples suggest that strong global integration can positively impact development.

Market Fundamentalism:

While governments can fail, so can markets in developing countries.
East Asia demonstrates how constructive government intervention can lead to growth.

Coordination Failure

Economic agents must be coordinated to achieve higher social welfare.
This coordination can be achieved through policies that incentivize similar actions and cooperation among agents.
The "Private Rational Decision Function" (S-shaped function) illustrates how economic agents respond to their environment based on expectations.
Equilibrium points occur where the S Function intersects the 45-degree line.

Big Push Theory

Leadership is needed to reach a higher equilibrium point.
The Big Push model highlights the need for a coordinated effort to overcome coordination failure and achieve industrialization.
The model emphasizes the importance of pecuniary externalities, which are spillover effects on costs or revenues.
Industrialization is difficult to initiate due to market failures, leading to coordination failure (e.g., steel and automobile sectors waiting on each other).

Problems with a "Super-Entrepreneur"

Capital market failures and asymmetric information hinder the emergence of a single entrepreneur capable of driving industrialization.
Communication failures and limitations to knowledge further complicate the process.
Lack of empirical evidence supports the feasibility of a "super-entrepreneur."

Big Push Mechanisms

These mechanisms address coordination failure and promote industrialization:
- Raising total demand
- Reducing fixed costs for later entrants
- Redistributing demand for industrializing firms
- Shifting demand towards manufacturing goods
- Defraying costs of essential infrastructure

Further Problems of Multiple Equilibria

Multiple equilibria exist, where the market may not naturally move to the preferred outcome.
Inefficient advantages of incumbency can hinder market adjustments.
Behavioral norms and linkages play a role in shaping the outcome of multiple equilibria.
Inequality, multiple equilibria, and growth are interrelated concepts.

Kremer’s O-Ring Theory

Assumes strong complementarities among inputs and positive assortative matching in production.
Output (Q) is determined by the product of input qualities (Q = q1 * q2).
Efficient allocation requires pairing high-skill workers with high-skill workers, and low-skill with low-skill ({HH, LL} is more efficient than {HL, LH}).

O-Ring Production Analysis Setup

Kremer's concept of "q" is flexible and can represent quality indices for various characteristics of goods.
Skill levels are a key factor in determining the quality of a good or service.

Bottleneck Effects

Reduced skill investments decrease the overall skill level in the economy, further discouraging skill investment.

Kremer’s O-Ring Theory: Implications

Workers with high-skills in developed countries earn higher income when working with other high-skilled workers.
Firms employ workers with similar skill levels for specific tasks.
Workers in high-skill firms earn higher wages than in low-skill firms for the same task.
Wages increase at an increasing rate with "q," leading to disproportionately higher wages in developed countries.
Individuals in high-skill environments have greater incentives to acquire more skills.
O-Ring effects amplify the impact of local production bottlenecks, as they have a multiplicative effect on production.
Bottlenecks also reduce the incentive for skill investment by lowering the expected return.

Economic Development as “Self-Discovery”

There is a problem with information, especially regarding comparative advantage.
Information externalities, such as knowledge about production processes, are difficult to predict.
Specializing solely on one sector is challenging due to difficulty in maintaining comparative advantage and ease of imitation.
Industrial policy can help identify true costs of potential products through:
- Encouraging exploration in the first stage
- Encouraging movement to more efficient sectors in the second stage

Case Examples

Uncertainty surrounding efficient production exists.
India's success in information technology was unexpected.
Local adaptation of foreign technology is crucial (e.g., shipbuilding in South Korea).
Imitation can occur quickly (e.g., China producing high-quality alternatives at lower prices).

Hausmann-Rodrik-Velasco Growth Diagnostic Framework

Focuses on identifying the most binding constraints on a country's economic growth.
Emphasizes avoiding one-size-fits-all development policy approaches.
Requires careful research to determine the most likely binding constraint.

The Growth Diagnostics Decision Tree

Features 10 categories of potential binding constraints as the "final boxes".
These categories are comprehensive, and many specific constraints fit within them.
Examples of potential additional "boxes" for constraint types:
- Environment: Climate change and ecological issues impacting productivity and investment.
- Conflict: Inability to resolve conflict disrupting economic activity.
- Social Capital (Cultural): Lack of trust hindering business relationships and economic interactions.

Practical Growth Diagnostics

Involves "economic detective work" to identify the binding constraint.
Analysts evaluate a proposed constraint by examining its implications:
- High movement into the informal sector if excessive taxation is a constraint.
- Significant congestion if infrastructure is a constraint.
- High rates of return to education if education is a constraint.
The analyst looks for economic behavior consistent with agents trying to circumvent the constraint.

Identifying a Binding Constraint

The shadow price of the constraint should be high (indicating significant opportunity cost).
Changes in the constraint should lead to substantial changes in the objective function (economic growth).
Economic agents should try to overcome or bypass the constraint.
Agents less reliant on the constrained factor are more likely to succeed, and vice versa.

Desirable Properties for Measures of Relative Inequality

Anonymity: The measure should be independent of who has higher income and personal opinions about the rich or poor.
Scale Independence: The measure should be independent of the size of the economy. It should measure income dispersion, not its magnitude.
Population Independence Principle: The measure should not be based on the number of income recipients.
Transfer Principle: If income is transferred from a richer to a poorer person, all other incomes constant, the new income distribution should be considered more equal.

Lorenz Curve

The Lorenz curve depicts the relationship between the percentage of income recipients and the percentage of total income they receive.
The 45-degree line represents complete equality.
The closer the curve is to the 45-degree line, the more equitable the income distribution.
The greater the curvature of the Lorenz line, the greater the relative degree of inequality.

Gini Coefficient

It is a statistical measure that quantifies the income or wealth gap between the richest and poorest in a country.
It is calculated by dividing the area between the Lorenz curve and the line of perfect equality by the total area under the line of perfect equality.
Values range from 0 (perfect equality) to 1 (maximum inequality).

Kuznets Inverted-U Hypothesis

Economic growth often leads to initial increases in inequality as the productive sector drives growth.
Over time, the Gini coefficient may decrease as income is redistributed within the economy.

Desirable Properties for Poverty Measures

Anonymity: The measure should be independent of individual identities.
Population Independence: The measure should be independent of the population size.
Monotonicity: If income is added to someone below the poverty line, all other incomes constant, poverty should decrease.
Distributional Sensitivity: If income is transferred from a poor person to a richer person, the resulting economy should be considered strictly poorer.
Focus Principle: A good poverty measure should only focus on the incomes (wellbeing) of the poor, not the non-poor.

Measuring Absolute Poverty

Headcount Index (H/N): This measure simply divides the number of poor people (H) by the total population (N).
It does not satisfy all desirable properties and can lead to unintended policy incentives.

Unintended Policy Incentives for Using Headcount Measures

Agencies focused on poverty reduction may be incentivized to report improvements based on headcount, even if those improvements are not meaningful.
Government policies often exhibit "urban bias," focusing on job creation for the poor in cities, where individuals are closer to the poverty line.
Organizations working in poverty reduction may tend to concentrate efforts in more accessible areas, leading to skewed results.

Total Poverty Gap (TPG)

Calculated as the sum of the differences between the poverty line (Yp) and the income (Yi) of each poor person.

Average Poverty Gap (APG)

Calculated as the total poverty gap divided by the total population.
Useful for comparing poverty gaps across countries.

Foster-Greer-Thorbecke (FGT) Index

A more advanced poverty measure that incorporates the severity of poverty.
It is a function of the poverty line, the income distribution, and a parameter "a," which determines the weight given to the severity of poverty.
When a=0, the FGT index reduces to the headcount index.
When a=2, it becomes the "P2" measure, which gives more weight to deeper poverty.

Defining Development

Development encompasses an improvement in real income, life expectancy, and education.
Growth in per capita income alone is not sufficient for development.
A significant increase in income for a specific income class does not equate to overall development.
Wealth concentration and trickle-down economics may not effectively distribute benefits across all segments of society.

Development Economics: A Broader Scope

Traditional economics primarily focuses on quantifiable metrics like per capita income and GDP growth rate.
Development economics expands its scope to include other crucial factors such as education, life expectancy, and quality of life.
It emphasizes the significance of institutions and their impact on economic well-being.

Purchasing Power Parity (PPP) and Income Levels

PPP measures income considering the cost of living in different countries.
Prices of goods and services tend to be lower in poorer countries, leading to a larger purchasing power.
Nominal income based on exchange rates can be distorted due to currency undervaluation, creating a false representation of income disparity.
PPP accounts for overall purchasing power, providing a more accurate picture of income distribution.

Lingering Effects of Colonialism on Development

Colonial powers employed different approaches based on their goals: settler, plantation, and exploitation.
Investment in social structures and institutions varied greatly based on the colonial model used.
The level of pre-existing institutions and economic resources available for a nation depends on the type of colonization experienced.

Contrasting Development Models

Linear Stages of Growth: This model suggests economies progress through a series of stages from traditional to advanced.
International Dependency Models: This model emphasizes the dependency relationship between colonizer and colonized economies, hindering economic growth.
Key differences include assumptions of homogeneity vs. power dynamics, production focus vs. dualistic developments, and upward mobility vs. structural constraints.

The Lewis Model: Assumptions and Implications

The Lewis model assumes a dual economy with a traditional and modern sector.
It posits that surplus labor in the traditional sector flows to the modern sector, driving growth.
The model's conclusions depend on the availability of surplus labor and the efficiency of resource allocation.
If the surplus labor assumption doesn't hold, labor shortages, higher costs, and reduced profitability in the modern sector could result.

Coordination Failure: A Barrier to Development

Coordination failure arises when economic agents fail to align their actions, leading to inefficient outcomes.
It can stem from:
- Anticipation of unfavorable future trends.
- Lack of confidence in the market.
- Lack of incentive for specific activities.
Examples include:
- Climate change: Individuals may not act due to the perception that their individual efforts won’t make a difference.
- Industrialization: Industries wait on each other, resulting in delayed growth without coordination.

The Hausmann-Rodrik-Velasco Growth Diagnostic Framework: Avoiding One-Size-Fits-All Policies

This framework highlights the importance of understanding specific growth constraints based on each country’s initial conditions and economic context.
Challenges to growth can vary across countries, including coordination failures, market failures, and policy failures.
Constraints are dynamic and change over time.
The framework emphasizes local knowledge and context-specific analysis for effective policymaking.

Investing in Children: A Household Perspective

The microeconomics household theory of fertility treats children as an economic decision.
Families consider the economic contribution potential of children and weigh it against the costs of raising them.
Income, price, and substitution effects influence the decision regarding the number of children desired.

The Opportunity Cost of a Mother's Time

A mother's time has significant opportunity costs, including forgone income, career progression, and educational advancement.
Educational attainment, household income, and market demand for labor can change these opportunity costs.
Higher educational attainment and income increase the opportunity cost of not working, leading to smaller families and greater emphasis on career advancement.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the relationships between population growth, development, and demographic transitions. This quiz covers key concepts such as population momentum and population dividends. Understand how factors such as education and workforce participation influence population dynamics.