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Practice Questions_2 - an underestimate of the true...

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Practice Questions 2 : ECO324 Lectures 3-4 Prof. Gustavo J. Bobonis 1. Define the four main issues in interpreting the correlation between two variables, A and B. Provide one example of each in interpreting the correlation between country-wide national income per capita and poverty rates (i.e., P 0 ). 2. Explain why the coefficient η can be interpreted as the elasticity of poverty with respect to income per capita in the regression model used by Besley and Burgess (2003): ln P it = θ i + η ln μ it + ε it (1) 3. How can we use this η elasticity to try to predict the necessary annual growth rate of income per capita to achieve the MDG poverty goal? Show this formally (mathematically). Based on your answers to question 1, discuss why this prediction might be biased and explain whether B&B(2003)’s prediction may be an overestimate or
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Unformatted text preview: an underestimate of the true necessary growth rate of income. 4. Including inequality ( σ it ) as an explanatory variable in regression model (1) results in the following equation. ln P it = θ i + η ln μ it + β ln σ it + ε it (2) where σ it ≡ standard deviation of the income distribution. Does redistribution help reach the MDG poverty goal? Based on B&B(2003)’s estimate of β , calculate by how much does a one standard deviation reduction in income inequality ( σ it ) reduces poverty and how large the change in inequality would have to be to achieve the MDG poverty goal. 5. Exercises #4, 6, 7(a), 8, 9 & 10 in Chapter 3, D. Ray. Development Economics ....
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