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[answered] 1. Economic inequality is the difference found in various m


hi can you answer question 2 and 3. please use the textbook resource. the question is the the file docx.docx


1. Economic inequality is the difference found in various measures of economic well-being

 

among individuals in a group, among groups in a population, or among countries.

 

From the table, within-country inequality will be the more important source of world

 

inequality as compared to between-country. 2. When analyzing the evolution of the world distribution of income (WDI), should we

 

use countries as the unit of observation or would it be better to use individuals?

 

Does it change our conclusions? Explain briefly.

 

3.

 

We should use countries as individual?s income distributions rather than using countries as the

 

unit of observation. However, Country distributions are constructed by combining national

 

accounts GDP per capita to anchor the mean with survey data to pin down the dispersion.

 

Poverty rates and head counts are reported for four specific poverty lines. Rates in 2000 were

 

between one-third and one-half of what they were in 1970 for all four lines. There were between

 

250 and 500 million fewer poor in 2000 than in 1970. We estimate eight indexes of income

 

inequality implied by our world distribution of income. All of them show reductions in global

 

inequality during the 1980s and 1990s. 3. In their 2010 book, Against Intellectual Monopoly, Michele Boldrin and David Levine

 

conclude that patents and copyrights are not necessary to provide protection for either

 

innovation or creative expression and should be eliminated. What is their reasoning? What

 

other means do they propose to appropriate the benefits of invention and creative

 

expression? Explain briefly Patent system provides incentives for innovation by granting the innovator a period of

 

exclusivity, during which he or she may be able to charge a supra-competitive price for its

 

technology or for products incorporating this technology. The result of this exclusivity is that

 

consumers will have to bear a higher price. It is this supernormal profit that is said to allow

 

innovators to recover the costs of innovation. However, without patent protection, competitors

 

will be able to imitate the technology quickly and cheaply, driving the price to its marginal costs,

 

which of course exclude sunk costs. Michele and Levine propose the following two means; Louis Kaplow?s Ratio Test

 

Michael Carrier?s Innovation-Based Framework

 

?constrained maximization? approach 4. The Romer model concludes that unregulated markets do not lead to the most efficient

 

allocation of resources, and that there is a tendency for competitive markets to provide too

 

little innovation relative to what is optimal (that is, the private rate of return on innovation

 

is below its social rate of return). In addition, most empirical work that has looked at this

 

question has concluded that advanced economies like the US probably underinvest in

 

research. Why is that? Can you express this in a formal manner? The idea that US may underinvest in research while intuitive is difficult to test empirically. The

 

key prediction is that there is ?missing? private R&D on scientifically feasible projects that

 

would be developed but for their long commercialization lags. In practice, we do not observe the

 

commercialization lags of projects that are never developed, and ?missing? private R&D is hard

 

to distinguish from alternative explanations such as a lack of market demand or a lack of

 

scientific opportunities.

 

We can express in a formal manner by providing evidence of a positive, significant social rate of

 

return to research council spending in terms of later private sector productivity. The marginal rate

 

of return appears to fall, though remains high, as we add further years of data to the analysis.

 

Given the substantial increase in research council investments over time, this declining return

 

indicates decreasing marginal returns to additional investment, but still suggests that additional

 

investments are likely to yield high social returns.

 

5. In the Solow model, output per person depends on capital per person. In the Romer

 

model, in contrast, output per person depends on the total stock of knowledge in the

 

economy (and not ideas per person). What is this difference due to and why is this

 

difference crucial in terms of economic growth in the long run?

 

In the Solow model, capital has diminishing returns, which is eventually only enough to offset

 

depreciation on capital. Capital has diminishing returns alone because labor and capital have

 

constant returns together. On the other hand, The Romer model does not have diminishing

 

returns to ideas because they are nonrival. This means that labor and ideas have increasing

 

returns together and the returns to ideas are unrestricted.

 

6. In the Romer model, what happens if there is an increase in population? If there is an

 

increase in the research share? All other parameters held constant, a change in population changes the growth rate of

 

knowledge. An increase in population will immediately and permanently raise the growth rate of

 

per capita output.

 

However, if there is an increase in the research share as well as an increase in the fraction of

 

labor making ideas and holding all other parameters equal, will increase the growth rate of

 

knowledge.

 

7. Growth accounting is not based in any particular model or theory of economic growth.

 

Then, why might the results of a growth accounting exercise be misleading? Hint 1: Why

 

might Alwyn Young be wrong in concluding that Singapore?s growth is a result of capital

 

accumulation? Hint 2: reading Easterly will probably help.

 

According to the Harrod?Domar model, the savings ratio and the capital coefficient are regarded

 

as critical factors for accumulation and growth. A country i.e. Singapore might for example save

 

and invest 12% of its national income, and then if the capital coefficient is 4:1 which means $4

 

billion must be invested to increase the national income by 1 billion, the rate of growth of the

 

national income might be 3% annually. However, as Keynesian economics points out, savings do

 

not automatically mean investment because liquid funds may be hoarded for example.

 

Investment may also not be investment in fixed capital.

 

However, assuming that the turnover of total production capital invested remains constant, the

 

proportion of total investment which just maintains the stock of total capital, rather than

 

enlarging it, will typically increase as the total stock increases. The growth rate of incomes and

 

net new investments must then also increase, in order to accelerate the growth of the capital

 

stock. Simply put, the bigger capital grows the more capital it takes to keep it growing and the

 

more markets must expand. 8. Why does Easterly say that ?the growth response to the dramatic educational expansion

 

of the last four decades has been distinctly disappointing?? Why were we expecting a large

 

return? What is Easterly?s explanation for the disappointing results? If you can, illustrate

 

with some examples and/or data from the cited literature

 

People were expecting a large return because of the widely held belief that education is the key

 

to human and economic development.

 

Easterly reports that while schooling did increase in the East Asian countries experiencing

 

growth miracles, educational attainment actually increased more in sub-Saharan Africa, which

 

experienced dismal growth. Furthermore, he notes that Eastern Europe and the former Soviet

 

Union compared favorably with Western Europe and the United States in years of schooling

 

attained, yet per capita incomes in those countries were substantially lower. However, Easterly also cites the work of Peter Klenow, who finds that variations in human capital growth such as

 

education explain less than 10 percent of the variation in growth rates across countries. 9. What is the difference between the absolute convergence hypothesis and the conditional

 

convergence hypothesis? Can you explain it in terms of a transition dynamics graph, as we

 

did in class? Explain briefly

 

Absolute convergence is where we can assume that k1 represents the capital-labor ratio of a poor

 

country and k2 the capital-labor ratio of a rich country. As they are otherwise identical, the

 

stability of the Solow-Swan model predicts that both the poor and rich countries will approach

 

the same k*. Notice that this means that the poor country will grow relatively fast, while the rich

 

nation will grow quite slowly. Stated differently in adjustment terms, as k1 < k2, then ? ? (k1) > ?

 

? (k2), so the marginal product of capital relative to labor is higher in the poor nations than in the

 

rich ones, thus the poor will accumulate more capital and grow at a faster rate than the rich. On

 

the other hand, the conditional convergence hypothesis states that if countries possess the same

 

technological possibilities and population growth rates but differ in savings propensities and

 

initial capital-labor ratio, then there should still be convergence to the same growth rate, but just

 

not necessarily at the same capital-labor ratio. This is due to the paradox of savings outlined

 

above. In short, the conditional convergence hypothesis asserts that countries can differ in the

 

their steady-state ratios (e.g. k1* vs. k2* in Figure 2 below) and thus differ in consumption per

 

capita, but as long as they have the same population growth rate, n, then all their level variables

 

-- capital, output, consumption, etc. -- will eventually grow at that same rate.

 

10. Why do engineers migrate from India to the US and not from the US to India? Explain

 

in terms of our growth models. Hint: remember the assumption that input markets are

 

perfectly competitive and, hence, w = MPL and r = MPK in both countries. Moreover,

 

consider the existence of two groups of workers: skilled and unskilled in both countries

 

The total labor endowment is OO* with initial distribution marked by L1; so labor endowment in

 

US is OL1 and that in India is O*L1. Labor is paid its marginal product, and factors of

 

production other than labor are immobile. The curve MP is drawn from the left and gives the

 

marginal product of labor in US as a function of the labor endowment in India. MP* is drawn

 

from the right and gives the same information for India. The areas beneath the relevant parts of

 

the curves represent total output in each country. As labor is unequally distributed, its marginal product is higher in US. If restrictions on migration were removed, LL* workers would migrate

 

until labor distribution L* was achieved and wages were equalized at point A. Global gain from

 

this would be the area MPLAMPL*. The gain to migrants would be ABCL1. The gain to the

 

immigration country i.e. net of wages paid to the immigrants would be ABC.

 

This can be illustrated in the graph below. 11. What does Easterly mean by ?leaks? of knowledge? And by ?matches? of skills? How

 

would you interpret these concepts in terms of the Romer model? How do these leaks and

 

matches cause the poor to be trapped in poverty? The leaks and matches are vulnerable to natural disasters such as famine, hurricanes,

 

earthquakes, tsunamis, and disease. These disasters can trap the poor in a vicious circle of

 

poverty. It is possible that economists sometimes overanalyze data and try to explain growth

 

variations with interesting controllable factors that are really the result of luck. Terms of trade swings and wars may be beyond the control of the country. Even with a lot of randomness, you

 

may be able to make good predictions with mean reversion. 12. In Easterly?s example of Noorul Quader and Daewoo, what kind of technology and/or

 

knowledge is being used? How was it transmitted? According to Easterly, did luck play any

 

role in the generation of a ?virtuous circle? of growth? Can luck in a particular period of

 

time generate a later ?technological dead-end?? Can you give us any examples? The Desh workers watched Daewoo and Noorul Quader create useful knowledge about making

 

shirts, selling shirts abroad, using special bonded warehouse systems, and using back-to back

 

import letters of credit in Bangladesh. They took that knowledge with them when they left Desh

 

and started their own garment firms.

 

Yes. It was pure luck from Desh's point of view that Daewoo was shut out of U.S. shirt markets

 

and needed to find a base in a previously shirt-free country. The Bangladeshi government

 

cooperated by permitting duty-free imports for exporters, which we can think of as raising the

 

feasible rate of return to the new investments.

 

Examples include the following scenarios; What did the explosion of the space shuttle Challenger on January 28, 1986 have to do

 

with the poverty of Zambia?

 

What if skilled workers can move across national boundaries? The matching story helps

 

explain the brain drain of some skilled workers from the poor countries to the rich

 

countries.

 


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