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1308ps01key - IS and Econ 13 Winter 2008 Problem Set#1...

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IS and Econ 13 Winter 2008 Problem Set #1 Answers 1. The more appropriate type of per capita GNI for measuring the material standard of living is the one based on "Purchasing Power Parity." That measure tries to take account of the differences in prices across countries. For example, a haircut in the US typically costs more that $15.00, whereas in many low-income countries it could well cost less than half a dollar at current exchange rates. The "purchasing power parity" adjustment to GNI per capita tries to take account of such differences, but of course it is no perfect either. Then, based on this measure, from the table distributed in class (that is also available on the Web) the poorest country in 2006 was Burundi. (It also happens that Burundi has the lowest per capita income even with dollars at prevailing exchange rates.) The country in located in the Central-East Africa, bordering Rwanda, Tanzania, and the Democratic Republic of Congo (formerly, Zaire). a. Liberia and Democratic Republic of Congo. I used “purchasing power parity (PPP)” because it more accurately takes into account relative inflation rates and cost of living. Liberia and Democratic Republic of Congo are located in the center of Africa 2. The definition of a corporation is a legal entity where ownership is separate from control. Adam Smith objected this separation because it would cause “agency problems”. Agency problems such as incentive misalignment occur due to information assymetricies as CEO/Managers know more than the shareholders. It is still relevant today, an example, “the mortgage crisis.” 3. The initial phase of the Industrial Revolution was associated with the following characteristics: a. The development of applied technologies (eg, the steam engine) and the finer division of labor. These reduced the energy and labor requirements for producing many existing goods and made possible the production of other goods not produced up to that point.
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