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Unformatted text preview: Pol 124 Midterm Study Guide 1. What is the difference between absolute and relative measures of poverty? Poverty is subjective; poverty gap index reflects change in average levels of living among the poor, does not change in distribution among poor Headcount measure, ie percent of population below a defined poverty line (doesnt distinguish between poor and very poor) Absolute: establish absolute minimum living standard below which people are living in poverty ($1/day or basket goods or nutritional value) o Poverty line has fixed purchasing power; 2 households with same real income are both either poor or not poor Relative: define poverty in relation to the rest of society (25% of average per capita income) o Compare people and gaps of inequality; political polarization o Poverty line tends to have higher real value in less poor subgroups 2. What is the difference between absolute and conditional convergence? Convergence refers to the tendency of less developed economies to grow more quickly than more mature economies. The theory is based on the idea that the growth rate will slow as an economy approaches the steady state level of capital per worker. Absolute convergence predicts that poor countries will grow more quickly regardless of their eventual steady state level of output. Conditional predicts this pattern only if the countries have similar steady state levels of output 3. What is the theoretical basis for the convergence hypothesis ? Convergence is conditional because the steady-state levels of capital and output per worker depend in the neoclassical model on the propensity to save, the growth rate of population, and the position of the production function characteristics that may vary across economies 4. The rate of poverty reduction depends on 3 things: economic growth, changes in inequality, and the level of inequality. Drawing on the Ravallion article, explain how each of these things affects poverty reduction, alone or in conjunction with one another. Poor countries at the national level are not catching up to rich ones, they are falling behind Growth: percent change in per capita income o (GDPPC t+1 GDPPC t)/GDPPC t o Per capita GDPs are generally expressed in terms of PPP and adjusted for price levels o Happiness: B1 Absolute Income + B2 Relative Income As people around you get richer, you get less happy (negative peer income) Hedonic treadmill: as the poor get more money, happiness increases but at a certain point it levels off A country is unequal if the rich have so much and the poor have almost nothing Growth is good and reduces poverty; uncontroversial Lowering inequality helps the poor, but is this the best approach; controversial Incomes of poor grow at a higher rate than those of the nonpoor Growth process is pro-poor iff poor people benefit in absolute terms Pro poor growth = distributional correction * ordinary growth rate Initial inequality makes growth more pro-poor...
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- Winter '08