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

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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.




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




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




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