Sample/practice exam 30 May 2019, questions and answers PDF

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Development Economics Sample QuestionsAre the following statements true or false? Briefly explain. 1. Estimates of per capita income calculated on an exchange-rate basis underestimate the real income of poorer countries compared to Purchasing Power Poverty (PPP) estimates. True 2. The Human Developm...

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Development Economics Sample Questions

Are the following statements true or false? Briefly explain. 1. Estimates of per capita income calculated on an exchange-rate basis underestimate the real income of poorer countries compared to Purchasing Power Poverty (PPP) estimates. True 2. The Human Development Index (HDI) includes components such as estimates of life expectancy, adult literacy and school enrolment rates, but does not include per capita income. False 3. The Harrod-Domar model states that a country's per capita growth rate depends on its rate of savings, whereas the Solow model states that it does not. True 4. In the Solow model, a change in the population growth rate has no effect on the long-run rate of per capita growth. True 5. Both Solow and Harrod-Domar models predict that if the capital-output ratio in a country is low, then that country will grow faster. False 6. In the Solow model without technical progress, output per capita goes down as capital per capita increases, because of diminishing returns. False 7. To understand if there is unconditional convergence in per capita income we need to study only countries which are currently rich, similarly to Baumol (1986) paper. False 8. The endogenous growth model with human capital predicts convergence in per capita income levels as poorer countries will catch up with richer countries by investing more in education. False 9. In the endogenous growth model with externalities, an economy with many privately owned firms will have lower investment in know-how compared to the economy where all firms are state-owned. True 10. Young (1995) paper provides evidence that the major factor of high growth rates in East Asian countries over the period 1965-1990 was an extraordinary high rate of technical progress, i.e., high rate of TFP growth. False

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PROBLEM TYPE QUESTIONS The first two questions have been discussed in the detail in class and in tutorial exercises. Question The economy produces output using capital K and labour L. Suppose that the total output is growing at the rate of 7% per year, the wage rate per worker is 0.1 (i.e. ten cents), the output price is $1. The labour-output ratio is 4:1. The stock of capital and labour are growing at the rate of 1% and 2% respectively. Finally, all output is paid out in wages and rent. 1. Calculate the shares of capital and labour in national income. Labour share: 0.1*4 = 0.4, Cap share = 1- 0.4 = 0.6 2. Estimate the rate of Total Factor Productivity (TFP) growth. 0.07 – [(0.4)*(0.02) + (0.6)*(0.01)] = 0.056 Question Consider Harrod-Domar model with .fixed capital-output ratio. Suppose that the country saves 10% of its income and has a capital/output ratio of 2. 1. Suppose that there is no population growth and no capital depreciation. Calculate the rate of growth of total income. g = (0.1)/2 = 0.05 2. Suppose that the population growth is 2% per year. Calculate the new growth rate of per capita income. How does it change compared to 1? Explain why. g*=0.1/2-0.02=0.03 Growth rate goes down as population growth has negative effect on per capita income growth.

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BROAD DESCRIPTIVE TYPE QUESTIONS 1. Describe two ways of empirically testing the predictions of the Solow model. To what extent does the simple Solow model succeed in explaining the diversity of developmental outcomes? How does augmenting the Solow model by incorporating human capital increase the ability of the Solow model to explain developmental outcomes? This is based on the lectures in week 3/4. See Slides 59-67 in Growth and Development part. Two ways of testing: 1) testing unconditional convergence to a steady state (like Barro 1991); 2) 2. What is the meaning of the term “underdevelopment trap”? Explain using different examples how it is possible for an economy to be stuck in an underdevelopment trap. This is based on Week 4/5 lectures, see the slides titled Development Trap. 3. This is also iscussed in class in Week 4/5 lectures; see the slides titled Development Trap.

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