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Answer the questions
Textbook: Economic Development 12th by Michael P. Todaro and Stephen C. Smith

Economics 114A Development Economics HW2

 

 

1. Use the following table to answer the following questions.

 

Country	Production of TV sets	Price of TV sets in local currency	Production of haircuts	Price of haircuts in local currency	GDP in local currency	GDP exchange rate	GDP PPP
A	56	$14	140	$5
B	21	28	15	2

 

 

1. Convert B’s GPD to dollars using the exchange rate. Assume the law of one price.

 

 

 

 

1. Convert B’s GPD to dollars using Purchasing Power Parity. Let your market basket be 10 TV sets and 10 haircuts.

 

 

 

Evaluate the market basket using exchange rate and PPP.

1. Evaluate if B’s currency is over-valued or under-valued. (Another way to think about it- CitizenA from country A is going to country B. Is the currency that CitizenA purchases (exchanging dollars to B’s currency) going to purchase more, less, or the same quantity of goods/services that CitizenA could purchase in country A?)

 

 

 

1. Evaluate if A’s currency is over-valued or under-valued. (Another way to think about it- CitizenB from country B is going to country A. Is the currency that CitizenB purchases (exchanging their currency into dollars) going to purchase more, less, or the same quantity of goods/services that CitizenB could purchase in country B?)

 

 

2. Check Gauchospace for your assigned country, answer the following questions.

 

1. Provide a (very) brief history of your country. (No more than ½ a page)

 

 

1. Calculate the old HDI using the formula. Do not pull calculated indexes from any websites. Calculate your own indexes.

 

 

1. Now allow GDP to increase by a factor of 4 (multiply your countries GDP by 4). Recalculate the HDI.

 

 

1. Assume adult literacy is 100%. Use your old income, not the increased income. Recalculate the HDI.

 

 

1. Which had the bigger affect on HDI, income or adult literacy? Briefly explain.

 

 

1. Calculate the NHDI using the formula. Do not pull calculated indexes from any websites. Calculate your own indexes.

 

 

3. China has been the fastest growing nation for the past quarter of a century. China’s per capita income has grown at an average annual rate of more than 8% over the last three decades drastically reducing poverty. The country’s per capita income is classified in the lower middle category by world standards, at about $3,180 (nominal, 104th of 178 countries/economies), and $5,943 (PPP, 97th of 178 countries/economies) in 2008, according to the IMF.

 

 

1996. China’s real GDP per capita increased from $564 in 1960 to $2,374 in 1996. Calculate the average annual growth rate of China’s real GDP per capita over the period 1960-1996 (36 years).

 

2008. Use your answer from part a. China’s per capita income was $5,943 (PPP) in 2008. What will China’s per capita income (PPP) be in 12 years (the year 2020)?

 

 

997. China’s real GDP increased from $997.5 billion in 1999 to $1,076.9 billion in 2000. Calculate the growth rate of China’s real GDP in 2000.

 

 

2020. Use your answer from part c, and recalculate China’s per capita income (PPP) in 2020.

 

 

 

1. Briefly explain why the prior calculation for GDP PPP (in 50 years) and your calculated GDP PPP (in 40 years) varies.

 

 

4. Briefly explain two different criticisms of the Lewis two sector model.

 

 

 

5. In your opinion, what criticism do you have of the Lewis two model?

 

 

6. Consider the Harrod-Domar model. Suppose that initially, a developing country’s capital-output ratio (k) is 5, and the savings rate (s) is 12% (let depreciation and population growth equal zero).
   1. What will be the initial GDP growth rate?

 

4. Suppose that technological advances cause the capital-output ratio to fall to 4. How will this affect the GDP growth rate?

 

1. Starting again from the initial situation, suppose instead that the national savings rate is increased to 15%. How will this affect the GDP growth rate?

 

1. What does the Harrod-Domar model tell us about the sources of economic growth?

 

7. Use your assigned country and the United States (or your home country) to compare the growth rate of GDP PPP between 2000 to 2020.

 

8. Draw a graph using the Solow model of a generic country. Specifically, graph output per worker, y, on the vertical axis, and capital stock per worker, k, on the horizontal. Draw in the production function y = f(k), the investment function s·f(k), and the straight line that has slope equal to (n + δ) k.
   1. What is a steady-state equilibrium? Mark the steady-state equilibrium on your graph as k₁*.
   2. Explain what steady-state means in words.
   3. Explain the process of countries to the left of steady state moves toward the steady-state.
   4. Suppose many years of hard work in population policy is finally paying off such that the population growth rate falls to n₂. Mark the new steady-state equilibrium on your graph as k₂*. Explain in words what has happened to this economy.

 

9. Consider the following “multiple equilibria” Solow graph:
   1. Which of these 5 equilibria are stable? Which are unstable?
   2. Assume the country is at an unstable equilibrium point. Explain why it is unstable.
   3. Of the stable equilibria, which is the most desirable?

 

10. Use the Lewis two sector model. Assume a country is in early stages of development and the you want to help develop the country using the Lewis two sector model. What would you predict about the production function before and after development of the country?