ECON313-past exam 2007

ECON313-past exam 2007 - ECON313 Faculty of Arts December...

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Unformatted text preview: ECON313 Faculty of Arts December Examination Economics 154-313 Sections 01 02 and 03 Economic Development Examiners: Prof. Franque Grimard (Section 01) December 11th, 2007 Prof. Eoghan Garvey (Section 02) 14:00 - 17:00 Prof. Moses Geepu Nah Tiepoh (section 03) Associate Examiner: Prof. Erin Strumpf Instructions: 0 This exam has four parts. 1: ANSWER EACH PART IN A SEPARATE BOOKLET, 0 Indicate clearly on each booklet, vom' name, student ID number, your section 1011 02 or 031 and the particular part vou are answering. THUS, YOU MUST RETURN AT LEAST FOUR (4) BOOKLETS I Carefully follow the instructions in each part. 0 SHOW ALL YOUR WORK. 0 Only Non-Programmable Calculators are allowed. 0 NO notes or texts allowed. 0 Dictiomn'es are allowed 0 You may keep the exam 0 This exam comprises 6 pages, including the cover page. ECON313 Parts A. B, C and D must be answered by students in the THREE Sections ANSWER EACH PART IN A SEPARATE BOOKLEl1 Part A: True, False and Uncertain — explain. (35 points) Please answer Z out of 10 questions in this section. Each question is worth 5 points. For each question in this section, please state whether the statement is true as written, and explain why. A good answer will define terms carefully and provide caveats to the statements made or provide details for the statements made, when this is appropriate. To receive maximum points, your answer should discuss intelligently the relevant literature and related lecture material. (Indicate clearly which question you are answering) 1) The 2003 Human Development Report reported that the HDI of Botswana was 0.614 (and its rank was 125) and that of the Philippines was 0.751 (and its rank was 85). Botswana’s per capita income PPP dollars) was necessarily smaller than that of the Philippines. The Lewis model and the Todaro model describe basicallythe same phenomenon. The Poverty Gap and the Headcount Index are equally useful in measuring absolute poverty in developing countries. The key difference between the Romer growth model and the Solow model is that the latter assumes increasing returns to capital, while the former assumes constant returns at both the industry and economy-wide levels. Sharecropping is economically inefficient. Children can be fairly described as “inferior” goods. The existence of market failures due to technological extemalities and / or pecuniary externalities justifies the call for a “big push” as a means to jump-start development. The best way to alleviate povertyin developing countries is to transfer payments to poor individuals through a means testing program. Sen’s concepts of functionings and capabilities help clarify the nature of the relationship between income per capita and the overall level of development of a society 10) Laws forbidding child labour tend to be good for everyone. ECON313 ANSWER EACH PART IN A SEPARATE BOOKLET Part B : Quantitative Question : Please answer one of the following two questions : (15 points) Question 1: Decidingon how many children to have in Fertiland Economists have begun to think that decisions by poor families in developing countries to have more or less children are linked to their rational preferences for a range of consumption goods, including children as a special kind of good. This question illustrates such a rnicroeconomic theory of fertility: Consider that a typical rural familyin a developing country, Fertiland, has a total annual income of $2000. Each year the household can spend this amount on material goods consumption (GP) and rearing new born babies If it spends its income all on goods consumption, it gets 400 units of goods. And if it spends it all on rearing new babies it gets 5 children. At present the household is observed to optimally ‘consume’ 160 units of goods and 3 children. (a) What are the prices of consumption goods and children? (b) What is the household’s budget constraint? Graph it together with an indifference curve that shows the family’ 5 initial optimum consumption. [For consistency, place the number Of children on the horizontal axis]. (c) Assume now that there are increased employment opportunities for women in rural Feriland such that their opportunity costs of rearing a child rise. Thus the price of a child is now $500 per year. Derive and illustrate the family’ 5 new budget constraint on a graph below, including the initial constraint and optimal consumption from part (d) Assuming this family considers children and material goods as substitutes, how will the increased women employment opportunities affect its fertility and children-bearing decisions? Illustrate the new optimal consumption point on the graph in part (e) Now the household’s annual income increases to $4000 (prices remain at their levels in part a). Illustrate its new budget line on the same graph in part Show also the new optimum consumption, if children are considered as inferior goods, but material goods are normal goods. Qiestion 2: Deciding on urban migration Two rural young people, Matiga and Toka, both aged 17, are contemplating leaving their village for a nearby urban town. Because Matiga has a secondary school certificate, she has a higher probability of obtaining an urban sector job than Toka who is only a primary school drop-out. If they remain in the village and work on their family farms, they each earn $200 per year if the yield is and $100 per year if the yield is lo_w. The yield will be high with probability 0.5 and will be low with probability 0.5. Alternatively, both young people can choose to migrate to the town, in which case they each 3 ECON3 13 expect to find a formal or informal sector job, paying the following earnings and according to the given probabilities: Informal Formal Informal Formal Informal sector sector sector sector sector (a) According to the Harris-Todaro model, on a one—year time horizon, which individual will migrate? (b) On a three-year time horizon, which individual(s) will migrate? (Assume that the rate of interest at which both can borrow or lend moneyis i = 5 percent). (c) Assume a one-year time horizon. Suppose now that there is a traditional family support penalty of $40 that all urban migrants must pay yearly to their relatives left in the village. At the same time, each bears a “psychological” cost associated with moving to the city. This represents the money equivalent of the disutility to the farmer from having to move away from the village. Such a cost is $25 for Matiga and $15 for Toka. Again, according to the Harris-Todaro model, which will this farmer migrate to the town? (d) Assume a one-year time horizon. Still maintaining the “psychological” costs associated with moving to the city, suppose now that all formal sector jobs also come with medical benefits, which are worth $30 a year, in addition to the wage. Informal sector jobs do not carry any 5 uch benefits. Same question again: according to the Harris-Todaro model, which individuals will migrate to the town? ANSWER EACH PART IN A SEPARATE BOOKLET Part C: Common Essay Question (26 points) Please read the following: At the heart of much work on developing countries is an effort to understand why poor households make the choices that they make given the environments they live in. Understanding these forms the basis of nearly all development assistance. A recent paper in the joumal g’Eamom'c Paspr vividly illustrates choices made by poor people. In their conclusion, the authors wonder why poor people do not save more. They muse: “... one senses a reluctance of poor people to commit themselves psychologically to a project of making more money” . Apart from lack of savings, the authors mention that another example of this reluctance concerns parents’ attitudes towards the education of their children. Parents tend not to react to the low quality of the schools their children attend, either by sending their children to better and more expensive schools or by 4 ECON3 l3 putting pressure on the government to do something about qualityin government schools. Thirdly, the authors point out that the poor tend not to specialize in their work (which prevents them from having at least a chance of higher earnings and escaping povertfi. Instead, the poor often tend to have multiple low-paying jobs none of which are unlikely to improve in the future. Question: Using the examples above or other examples that you can think of from the course, show how sometimes the poor seem to choose actions which may well have, or seem to have, long term negative effects for themselves or their families. What factors do you think lie behind these choices? From a policy point of View, are there any suggestions that you can make? ANSWER EACH PART IN A SEPARATE BOOKLET Part D: Please answer 3 questions out of the following 6 questions (24%) 1. You have been hired as an expert in growth and development for the country of Devoland, a poor developing country. The President of the country has been to an international conference where she was told that, increasingly, poor countries were catching up to developed countries in terms of rates of education, fertility rates and health indicators such as infant mortality rates and life expectancy. Furthermore, she saw a Western expert arguing that this convergence of factors that are inputs in the overall economy’s production function implies that there should be soon a convergence in the outputs of the countries. In other words, the expert argues that economies such as the one from Devoland will be able to converge with richer countries’ economies. The President is asking you whether you think that the Western expert is correct. Discuss the point made by the Western expert, carefully outlining the assumptions and factors that may support or invalidate what the President has heard. 3M) At a conference on sustainable development, an environmental activist condemns the use of high yield variety of seeds, citing the negative environmental consequences of the Green Revolution. Meanwhile, the person sitting next to you in the audience (a Neo- Malthusian from Populand) whispers to you that HYVs will prevent negative checks from occurnng in his highly populated country. Who do you agree with and why? In your essay, choose one side but make sure to argue both the pros and the cons of both arguments. Be clear and concise, but provide analysis in your answer and explain each point of view. Make sure to look at the problem from all angles. 3. As a well-known economist, you are asked by the president of your country (a low— income country with a fast growing, largely unemployed, urban population) to approve of her new education policy. She is very enthusiastic about education, having studied economics herself at university. She knows that the more that people are educated, particularly the more third level education they have, the more human capital there is in the country. She also knows that more human capital will inevitably lead to increased economic growth. So she has decided on a large expansion of educational funding, especially for third level. You have 5 ECON3 13 studied economics more recently than her. \What reservations might you have about her point of view. Craft a letter to her outlining your understanding of the possible pitfalls of her educational policy and recommend your own (which may, in the end, be quite close to hers or may clearly differ). . You are managing the economy of a small low-income country. You are under a lot of pressure to carry out “pro—poor” and “anti-inequality” policies. But your own main concern is economic growth. Discuss some of the tensions or trade-offs that might exist between the twin aims of reducing inequality and increasing growth. Discuss also the effects of growth on inequality and of inequality on growth. Are there particular policies you can suggest that might help in achieving both aims simultaneously or is the tension between the two aims simply irreconcilable? . You are an expert on health in developing countries. A colleague of yours argues that she is concerned that that the sums pushed into so-called "vertical" health programs, set up to tackle particular diseases such as the Global Fund against AIDS/ HIV, Tuberculosis and Malaria, can have unintended negative consequences. In particular, they risk diverting attention from, or even undermining, broader "horizontal" health systems established to prevent and treat all forms of ill-health. Discuss whether or your colleague is correct and what type of health policies should countries, developed and developing ones, should undertake in order to improve the health of individuals in poor countries. . A key policy debate in the discourse on agricultural and rural development relates to how cash crop production influences the achievement of food securityin developing countries. One of your colleagues points out that those who support the view that cash cropping has a complementary and positive impact on achieving food sufficiency through both its direct contribution to the growth of farm incomes and indirect effects on the productivity of other household activities, such as food crop cultivation. Another colleague disagrees, as he argues that the relationship between both types of crops is largely mutually exclusive since these crops compete for the same productive resources and are therefore likely to be substitutes in production, at least in the short run. Given that you are a rural development and poverty expert, the president of your country asks you to write a short, but careful, essay on the relative merits of the two arguments mentioned above. In particular, you may consider the following question in your essay. Given high food-marketing costs in developing countries due to their weak rural transport infrastructure, and the volatility of their exchange rates, can rural households generate sufficient incomes from cash cropping to be guaranteed of their \required food needs? ...
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This note was uploaded on 10/09/2010 for the course ECON 313 taught by Professor Iforget during the Spring '10 term at McGill.

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ECON313-past exam 2007 - ECON313 Faculty of Arts December...

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