Econ Midterm Study Guide PDF

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Econ Midterm Study GuideChapter 1Notes ● Important Role of Values in Economic Development ○ Economics = social science → cannot be value-free ■ Validity of economic analysis and correctness of prescriptions must be evaluated in light of underlying assumptions/value premises ○ Value premises: what is...

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Econ Midterm Study Guide Chapter 1 Notes ● Important Role of Values in Economic Development ○ Economics = social science → cannot be value-free ■ Validity of economic analysis and correctness of prescriptions must be evaluated in light of underlying assumptions/value premises ○ Value premises: what is or is not desirable for achieving ‘human potential’ ■ Subjective: economic/social equality, elimination of poverty, universal education, rising levels of living, national independence, modernization of institutions, rule of law, due process, liberal democracy, access to opportunity, political/economic participation, personal fulfillment, self-reliance ■ Private property, right to unlimited wealth, traditional hierarchical/inegalitarian household/societal norms ● Economies as Social Systems: Beyond Simple Economics ○ Social system = interdependent relationships between economic and noneconomic factors, including values, attitudes, power structure, and traditions ■ Factors vary widely ○ Be mindful of roles of values, attitudes, and institutions play in development (domestic and international) ■ Attitudes → towards value premises ■ Institutions → humanly devised constraints that shape interactions ● Formal and informal ● What is Development? ○ Development: process of improving quality of lives and expanding capabilities, giving people the freedom to realize more and better functionings → raising levels of living, self-esteem, and freedom ○ How can we achieve that? ■ Expand economic liberties. Freedom to choose how to produce, sell, and use your own resources, while respecting others‘ rights to do the same. ■ Expand political liberties, because valuable per se. ■ Distributive justice: should we help the poor? The disadvantaged? ● Not everyone starts with the same “original position" in society, has the same chances to succeed → equalize opportunities. ●

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Philosophical Approaches to Development ● Utilitarianism: increase welfare and happiness by all means ○ Paternalistic? Should we force people to be happy? ● Libertarianism: expand political liberties ○ But people may value consumption goods (economic welfare) more\ ● Economics (narrow view): raise income, economic wealth ○ Increase welfare and expand liberties ○ What about distribution of wealth? Political liberties? Traditional Economic Measures

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Development = achieving sustained rates of growth of income per capita to enable a nation to expand its output at a faster rate than its population growth ■ GNI = total output claimed by residents of a country (domestic and foreign) ● GDP + factor incomes from residents abroad - incomes from non-residents within territory ■ Focus on industrialization ■ Emphasizes utility, profit maximization, market efficiency New Economic View of Development ○ Development = Multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, reduction of inequality, and eradication of poverty ■ poverty is more than lack of income – it is inherently multidimensional, as is economic development Amartya Sen’s Capability Approach ○ “Capability to function” ○ Poverty cannot be measured by income or utility; what matters is not the things a person has OR the feelings they provide (utility = happiness), but what a person is, or can be, and does, or can do ■ Think beyond the availability of commodities ○ Five sources of disparity: (make commodities more/less useful ■ Personal heterogeneities: gender, age, disability, illness ■ Environmental diversities ■ Variations in social climate ■ Distribution within the family ■ Difference in relational perspectives → ex. what it takes to appear in public without shame in a low-income country v a high income country ○ Functionings: what people do or can do with the commodities they have ■ A valued ‘being or doing’ ■ Ex. being healthy, well nourished, well clothed, mobile; having self esteem; participating in community life ● Functioning is an achievement ● Ex. Bicycling → different from having a bicycle and from the happiness happiness generated by bicycling ■ Depends on ● Social conventions ● Position of the person in the family/society ● presence/absence of festivities ● Physical distance from friends/relatives ○ Capabilities: freedoms a person has given their personal features and command over commodities ■ Real income is essential, but to convert the characteristics of commodities into functionings, requires health and education as well as income Development and Happiness ○ Seven factors that affect national happiness: family relationships, financial situations, work, community and friends, health, personal freedom, personal values ■ Subjective well-being

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Three Core Values of Development ○ Sustenance: the ability to meet basic needs ■ Food, shelter, clothing → necessary to sustain a human life at the bare minimum level of living ○ Self-Esteem: to be a person ■ Worth and self-respect → authenticity, identity, dignity, respect, etc ■ National prosperity is important to this sense of worth ○ Freedom: to be able to choose ■ Freedom = the emancipation from alienating material conditions of life, and from social servitude to nature, other people, mistery, oppressive institutions/beliefs ■ Expanded range of choices & minimization of external constraints ● Wealth increases choice: leisure, goods and services, spirituality ■ Political freedom: security, rule of law, free expression, participation, opportunity Three Objectives of Development ○ Increase availability and widen distribution of basic life-sustaining goods ○ Raise level of living (multilateral) ○ Expand the range of economic and social choices MDGs ○ Acknowledge the multidimensional nature of development and poverty alleviation ○ Unified focus in the development community: collective commitment ■ Developed in consultation with developing countries → most pressing problems ■ Participation of key international agencies ■ Specific responsibilities for rich countries: increased aid, removal of barriers, eliminating debts ○ 1. Eradicate extreme poverty and hunger 2. Universal primary education 3. Gender equality/empowering women 4. Reduce child mortality 5. Improve maternal health 6. Combat diseases 7. Environmental sustainability 8. Global partnership ○ Criticisms: not ambitious enough, goals not prioritized, goals not integrated, arbitrary measurement of poverty, $1 a day too low a standard SDGs: universal shifts ○ Leave no one behind ○ Sustainable development at core: integrate environmental dimensions ○ Transform economies for jobs and inclusive growth ○ Build peace & improve institutions ○ New global partnership

Additional Concepts for Review ● Absolute Poverty: being unable to meet minimum levels of sustenance/basic essentials ● Development economics: how econ. achieve growth, reduce poverty, increase income ● Globalization: increasing integration of national economies into expanding int’l markets ● Less developed countries (LDCs): characterized by low levels of living & other deficits ● More developed countries (MDCs): economically advanced capitalist countries ● Political economy: merge economic analysis with practical politics ● Subsistence economy: production for personal consumption → little monetary income

Chapter 2: Comparative Economic Development Notes: ● Defining the Developing World ○ Low-income countries: GNI per capita < $1025 (2011) ○ Middle-income countries: $1025 < GNI pc < $12,745 ■ Classified by world bank ○ Newly industrializing countries: relatively advanced level of development; dynamic industrial sector; close links to int’l economic systems ○ Least developed countries: low income, low human capital, high economic vulnerability ○ Human Capital: investments in people → skills, values, & health resulting from expenditures on education, job training, & medical care ● Basic Indicators of Development: Income, Health, and Education ○ Income Indicators: GNI pc = used as a summary index of relative economic well-being ■ Per capita GNI comparisons between developed and less-developed countries are exaggerated by exchange rate conversions ● Does not measure relative domestic purchasing power ■ Compare relative GNIs and GDPs using PPP instead of exchange rates as conversion factors ● Common set of international prices for goods and services, to provide more accurate comparisons of living standards ■ Capital stock: total amount of physical goods existing at a particular time that have been produced for use in the production of other goods/services ● Depreciation: wearing out of buildings, infrastructure, equipment, & other forms of capital ○ Indicators of Health and Education ■ Prevalence of malnutrition; primary school completion rate; child mortality rates; life expectancy ● Holistic Measures of Living Levels and Capabilities ○ Human Development Index (HDI): index measuring national socioeconomic development, based on combining measures of education, health, and adjusted real income pc ■ 0 to 1 scale ■ Health dimension = life expectancy ■ Education dimension = average & expected years of schooling ■ Income dimension = real pc GDP adjusted for for PPP and for diminishing marginal utility of income ● Diminishing marginal utility: subjective value of additional consumption lessens as consumption becomes higher ○ HDI can be calculated for groups and regions in a country ■ HDI varies among groups within countries, across regions in a country, between rural and urban areas ● Characteristics of the Developing World: Diversity within Commonality ○ Lower levels of living and productivity ■ Large gaps in output per worker in developed v developing countries ● Contributes to income disparities

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Poverty trap: low income → low investment in education, health, infrastructure → low productivity & economic stagnation ■ No necessary correlation between size (area or population) and development ○ Lower levels of human capital: health, education, and skills ○ Higher levels of inequality and absolute poverty ■ International inequality: rich countries v poor countries ■ Domestic inequality: rich and poor within a country ● Varies greatly among developing countries ■ Extreme poverty → due in part to low human capital but also to social and political exclusion and other deprivations ■ Poverty and inequality result from AND cause distorted growth ○ Higher population growth rates ■ Dependency burden: population age 0-15 and 65+ ○ Greater social fractionalization ■ Ethnic, linguistic, and religious diversity → cooperation failures ○ Larger rural populations → rapid rural-to-urban migration ■ Higher rural populations in developing countries → poorer ○ Lower levels of industrialization/manufactured exports ■ Industrialization is associated with higher productivity and income ■ Low income countries: agriculture is less efficient → higher populations but relatively low outputs ■ Higher dependence on primary exports ○ Adverse Geography ■ Landlocked countries, extreme heat, limited arable land, natural resources, topography and infrastructure, climate and disease ■ Resource endowments: supply of usable factors of production ● Resource curse ○ Underdeveloped Markets ■ Legal and institutional foundations for markets are weak → inefficient ● Enforcement of property rights ● Infrastructure: transport and communication costs ● Stable/dependable currency ● Regulated banking system & insurance → formal credit markets ● Market information: prices, quantities, qualities: consumer/producer ● Social norms facilitating successful long-term business relationships ■ Economies of scale, widespread externalities, thin markets → low demand ■ Incomplete information → misallocation of resources, funds, and goods ○ Colonial Legacies & Unequal International Relations ■ Developing nations have weaker bargaining power in int’l economic relations → dependence on developed countries → cultural/environmental How Low-income Countries Today Differ from Developed Countries in Earlier Stages ○ Physical and Human Resource Endowments ■ Developing countries are less well-endowed with natural resources and skilled human resource endowments (most) ● Need heavy investments of capital to exploit natural resources ● Idea gap: ability to apply innovative ideas to solve practical problems

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Relative Levels of Per Capita income and GDP ■ Lower level of real pc income now than then ■ Developed countries were economically advanced when they began their development ● Now, developing countries are at the bottom of the pc income scale ○ Climatic Differences → adverse geography (tropical/subtropical climate) ○ Population size, Distribution, and Growth ■ Populations are growing much more rapidly in now-developing countries than they ever did in now-developed countries ● Higher person-to-land ratios ■ Absolute pop size of now-developed countries was much smaller ○ Historical Role of International Migration ■ The possibility of international migration of unskilled workers no longer exists on a scale proportional to that of the 19th and early 20th centuries to provide an equivalent safety valve for unskilled contemporary populations of Asia, Africa, and LatAm ● Restrictive immigration policies ● Migration reduces poverty for migrants and their families, and most of the poverty-reducing benefits of migration are returned to the origin country through remittances ■ Brain Drain: loss of valuable human resources, inhibits economic progress ○ Growth Stimulus of International Trade ■ Now-developed countries benefitted in the 19th century from free trade, and free movements of labor and capital ● Dynamic growth of international exchange ■ Developing countries face declining terms of trade (ratio of export prices to import prices), deteriorating trade positions, and barriers to trade ○ Basic Scientific and Technological Research and Development Capabilities ■ Low-income countries are at an extreme disadvantage regarding scientific and technological research ● Innovations were made possible by greater wealth, in turn sustaining economic growth ○ Efficacy of Domestic Institutions ■ Now-developed countries: stronger political stability, more flexible social institutions, broader access to mobility ■ States emerged more organically over longer period of time Are Living Standards of Developing and Developed Nations Converging? ○ Diffusion of ideas across countries → skip trial and error and experience fast growth to catch up ■ Related to concept of “advantage of backwardness” also called the “latecomer’s advantage” → no need to innovate on your own, just take what others have done ● Technology already exists → no need to reinvent the wheel ● BUT you need to pay → what if you don’t have the money to gain access to this technology

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Arguments supporting convergence ■ Diminishing returns to capital (though as economies develop they often find ways to compensate) ■ Diffusion of ideas across countries, so can skip trial and error and grow fast while catching up ● Related to the concept of “advantage of backwardness” (Alexander Gerschenkron), also sometimes called “the latecomer’s advantage” Evidence of unconditional (absolute) convergence is hard to find ■ Due to relatively low starting levels, income gains are still smaller than in developed countries → difference in incomes can still widen before it shrinks But there is increasing evidence of “per capita income convergence,” weighting changes in per capita income by population size ■ Relative convergence: relative gap in income would be shrinking → faster growth rates in developing countries ■ Weight the importance of a country’s pc income growth rate proportionately to population size World-as-one: look at inequality changes both within and between countries ■ “Global inequality” rose or fell Sectoral Convergence: cross-national convergence of economic sectors ■ Signal potential for future, overall convergence ● Ex. Convergence in manufacturing

Solow’s Neoclassical Model/Exogenous Growth Model ● Are living standards of developing and developed nations converging? ○ Diminishing returns to capital → developed countries will cap out, whereas developing countries will be able to spike in growth ● Allows for substitution between labor and capital ● Convergence: has happened in many countries (emerging countries - China, India) → but per capita income in poorer countries generally do not converge towards those of developed countries in the way the model predicts ○ Unconditional convergence: poor countries will eventually catch up with rich countries → similar living standards ○ Conditional convergence: occurs when countries with similar characteristics will converge (savings, investment, population growth) ○ No convergence → living standards don’t catch up ●

Nature and Role of Economic Institutions ○ Institutions provide “rules of the game” of economic life ○ Provide underpinning of a market economy ○ Include property rights; contract enforcement ○ Can work for improving coordination, ○ Restricting coercive, fraudulent and anti-competitive behavior ○ Providing access to opportunities for the broad population ○ Constraining the power of elites, and managing conflict ○ Provision of social insurance

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○ Provision of predictable macroeconomic stability Long-Run Causes of Comparative Development

Chapter 3: Classic Theories of Economic Growth and Development Notes ● Development is usually defined in a national context → may necessitate modification of the international economic and social system as well ● Development-as-growth: linear-stages theories ■ Marshall Plan & historical experience of industrialization and development ● Utility of massive injections of capital ● Capital fundamentalism ○ Stages-of-growth model (Rostow) of development: theory of economic development according to which a country passes through sequential stages in achieving development ■ Mobilization of domestic and foreign saving in order to generate sufficient investment to accelerate growth ■ Development process = series of successive stages of economic growth ■ Saving, investment, and foreign aid was necessary for economic development ● Marshall Plan → based on comparison between developing countries and developed countries post world war ○ Includes false assumptions → focuses analysis on developed countries ■ Role of accelerated capital accumulation in economic development → capital is key

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Rostow’s Stages of Growth Traditional society → agrarian, etc. Preconditions for takeoff → beginnings of manufacturing Takeoff → industrialization, competition, social/political mobilization Drive to maturity Age of high mass consumption

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All advanced economies have passed stage of takeoff into self-sustaining growth ○ Developing countries are still in traditional society or preconditions stage or pre-takeoff ■ Why? → How low-income countries today differ from nowdeveloped countries in their earlier stages (8 differences) ● Resource endowments ● Per capita incomes and GDP ● Climate ● Population → size, distribution, growth ● Migration → historical role ● Int’l trade benefits ● R&D → science & technology ● Domestic institutions ■ Rostow missed this Harrod-Domar growth model (AK model) ■ Growth rate (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio © ■ In order to grow, new investments representing net additions to the capital stock are necessary ● New investment will bring about corresponding increases in the flow of national output, GDP ■ Net investment = change in capital stock = capital-output ratio x national income = national saving ● Capital-output ratio: how many units of capital it takes to produce one additional unit of output ● Net savings ratio: savings expressed as % disposable income ■

The Harrod-Domar growth model stresses the importance of saving and investment as key determinants of growth ● Lack of adequate investment (financ...