EC 320 PS 1 answers

EC 320 PS 1 answers - Economic Development CAS EC 320...

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Economic Development CAS EC 320 Problem Set 1 September 23, 2010 Answers Each question is worth 10 points. 1. What is economic convergence? Use a diagram to explain your answer. What is the evidence on convergence over the past 30-50 years? What are the implications of this evidence for economic policy in developing countries? Economic convergence occurs when the difference in income between the richest and the poorest countries narrows. This would occur if the poorest countries grew faster than the richest countries. The diagram has the growth rate in per capita income over some period of time on the vertical axis and per capita income at the beginning of the period on the horizontal axis. Convergence would occur if the dots representing different countries were along a negatively sloped line. This would indicate higher growth rates for poor countries than for rich countries. Evidence on per capita income does not indicate that there has been convergence over the past 30 or 50 years. There has been little connection between growth rates in per capita income and the initial level of per capita income. However, some poor countries have grown much faster than rich countries. These countries have generally followed certain economic policies that allowed them to catch up with the rich countries. The implication is that if other developing countries adopted these policies, they also could grow faster than the rich countries. 2. What is purchasing power parity (PPP)? How is it calculated? What are the PPP per capita GDP and nominal per capita GDP of your country or your parents’ country? If you and your parents were born in America, pick a country that begins with the same letter as your last name. To calculate per capita GDP using purchasing power parity, statisticians calculate (a) the number of units of a domestic currency needed to buy a market basket of goods, and (b) the number of US dollars needed to buy that market basket in the US. This market basket includes the kinds of goods bought by average people in developing countries. They then divide per capita GDP in domestic currency by (a)/(b) to find PPP domestic per capita income in US dollars. For developing countries, PPP per capita income is usually much higher than per capita income in nominal terms, where domestic per capita income in local currency is converted into dollars at the nominal exchange rate.
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3. What is the Human Development Index? How is it constructed? What are the HDI rank and per capita GDP rank of “your” country? The HDI combines measures of life expectancy at birth, the percent of the population 15 years and older that is literate, the percent of school age children who are actually enrolled in school, and per capita income measured in PPP. Each of these measures in used to calculate an index, and these indexes are added together to calculate a country’s Human Development Index. Countries are then ranked according to the HDIs. 4.
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EC 320 PS 1 answers - Economic Development CAS EC 320...

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