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.
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
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
This question was answered on: Sep 18, 2020
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