Problem Set 4 Solutions

Problem Set 4 Solutions - Problem Set 4 Solutions Due...

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Unformatted text preview: Problem Set 4 Solutions Due September 8th, 2010 1. Ch. 13 ‐ Income Inequity a. Explain the intuition behind the Kuznets curve (both increases and then decreases in income inequality as a country develops.) As a country develops, income inequality tends to increase and then decrease, as described by the Kuznets curve. This is due to the fact that as “high­skill” jobs are introduced to an economy, people in those jobs will experience large increases in income. Then as individuals respond to the difference in wages across sectors of the economy by obtaining more human capital, income inequality will begin to decrease once again. b. Calculate the Gini Coefficient for the economy represented by the Lorenz curve in the graph below. 1 1 1 1 Area under Lorenz Curve (B) = (1)(10) + (1)(20 − 10) + (1)(10) + (1)(40 − 20) + (1)(20) + (1)(100 − 40) + (1)(40) 2 2 2 2 = 5 + 5 + 10 + 10 + 20 + 30 + 40 = 120 1 Area of Whole Triangle (A + B) = (100)(4) = 200 2 A (200 − 120) 80 = = 0.4 Gini Coefficient ( )= (A + B) 200 200 2. Ch. 15 – Geography Climate and Natural Resources a. What is the link between climate and output? More temperate climates result in higher income per capita. b. Explain two factors that might be driving this relationship. 1. Agricultural production is higher in countries with more temperate climates. 2. People may exhaust themselves faster in warmer climates, leading to lower human capital (worker productivity). 3. The prevalence of infectious diseases in the tropics leads to lower human capital (worker productivity). c. What is the Natural Resource Curse? The natural resource curse refers to the fact that ownership, or discovery, of natural resources does not necessarily lead to growth, and can sometimes be harmful to an economy. d. Explain two factors that may result in the Natural Resource Curse. 1. Conflict over resource ownership. 2. Investment in extraction may lead to a decrease in investment in other industries. 3. Exporting the resource too quickly may lead to deflation which is harmful for other exporting industries. 4. Overconsumption may lead to a decrease in investment in future production. 3. Ch 12 ‐ Governance a. Explain why low income countries may be more susceptible to poor governance. Low income may also indicate low levels of average education, which leads to low levels of political involvement and lax accountability. b. What role does the rule of law play in promoting growth? 1. 2. 3. 4. Social Stability Enforcement of Contracts Consumer Protection Agencies Intellectual Property Rights The rule of law is essential to ensure consumers and producers are protected, providing the possibility for growth. c. In what ways can democracy promote growth? Democracy may promote growth by limiting government power and holding politicians accountable to the public. d. In what ways can democracy hinder growth? Democracy may hinder growth by increasing instability, especially in countries with many different ethnic groups. Politicians may also have an incentive to focus on short­term improvements rather than long­term growth. 4. Global Warming a. The Earth’s Temperature is a global public good. Explain why this makes it difficult to sustain the socially optimal climate. Since the global temperature is a public good, it can only be optimally provided by a global government. Since there is not a good global government capable of enforcing policy, countries will pollute too much as the benefit of pollution goes to the individual country whereas the cost of pollution is felt by the entire world. b. How do the potential consequences of global warming for the developing world differ from the potential consequences for industrialized nations? Developing countries are likely to be affected to a much greater degree than industrialized countries. This is true because developing nations are not able to invest in preventative measures and are less prepared to respond to natural disasters. Developing countries are also mostly located in the tropics where the affects of climate change may be the most extreme. c. What are the arguments for allowing developing nations to increase their carbon emissions, despite concerns about global warming? Limiting the emissions from developing countries will greatly hinder any economic growth. Also industrialized countries are largely to blame for man­made global warming, so perhaps they should bare the brunt of the costs. ...
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This note was uploaded on 12/05/2010 for the course ECON 114 taught by Professor Cindybenelli during the Summer '08 term at UCSB.

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