Questions and Answers of Development Economics

Why might environmentalists and trade protectionists form political alliances in developed countries?
Understand why the Heckscher-Ohlin model does not lead to complete specialization, in contrast to the Ricardian framework. Take the car-textiles example studied in this chapter. Recall that in our
If poorer people consume a greater proportion of those products which are produced using a high intensity of unskilled labor (relative to physical and human capital), show that international trade
Two countries, A and B, identical in all respects, each produce two goods, bread and wine, using a single input, labor. The production of each good is carried out under constant returns to scale.But
By drawing production possibility frontiers and international price lines, show that trade can be viewed as just another method of production, where exports serve as “inputs” and imports are
(a) Show that if all individuals in a country have the same holdings of all factors of production (and the same shareholdings in all companies), and if there are no externalities, the opportunity to
Suppose that we divide commodities into two groups: food and nonfood.(a) Draw indifference curves that reflect the fact that preferences for food grow relatively weaker as we increase consumption of
Review the arguments for trade policy in this chapter, paying particular attention to (i) Externalities (ii) Distributional issues and (iii) Capital market imperfections. Show that these arguments
Discuss circumstances under which tariffs and quotas have equivalent effects, and circumstances under which they do not. Pay particular attention to(i) Issues of tariff revenue,(ii) The possibility
Suppose that domestic producers in a developing country are able to produce cement at a unit cost of $5 per kilogram, up to a capacity limit of ten million kilograms a year. The world price of cement
Here is the large-country argument for an optimal tariff. Recall the welfare analysis conducted for tariffs in this chapter. We will use this methodology in the exercise that follows.(a) For
Suppose that the government follows a policy of infant-industry protection, allowing the domestic production of automobiles in an economy sheltered by tariffs on car imports.(a) Discuss the critical
It may be optimal for a country to restrict the exports of some commodity for which it is a principal exporter. Examine this statement. In particular, address the question of why individual exporters
The liberalization of agricultural exports is a major issue in India. Higher exports for farmers will mean greater revenues and higher prices for them. Why might the government be opposed to such a
Developed countries argue for the protection of intellectual property rights in developing countries, so that new technological advances can be protected by means of patents. They argue that such
Suppose that there is a single lender and a single borrower, and there is no legal mechanism to enforce loan repayment. A borrower can costlessly keep any amount borrowed, but the lender can then
“Governments never go bankrupt. So, lending to them is a wise idea. They can always repay.” Using the concepts of involuntary and strategic default (see Chapter 14), examine this statement
Countries that have a high international debt face what is called the debt overhang. The prospect of having to service a large debt from investment returns discourages investment. In such situations,
Conditionality” refers to the specification of certain policies that a government must follow in order to receive loans or assistance from international organizations such as the International
The “gains-from-trade” theorem tells us that irrespective of what other countries do, free trade is the best policy for any country. Yet countries routinely threaten to pursue restrictive trading
If the status quo is restricted trade, a liberalization policy may not have popular support even if it will benefit a majority of the population and even if the monetary value of the gains outweighs
Critically review the general arguments that suggest that increased trade between similar countries is more likely to lead to actual rather than potential Pareto improvements, while the opposite is
Why might developing countries with a poorly developed system of income taxes be reluctant to have free trade?
Consider the following parable. There are five individuals. They can form into groups of different sizes. A group of size 1 gets a total income of $100; of size 2, $250; of size 3, $600; of size 4,
Evaluate the validity of the following statements.(a) A developing country is likely to have an overall death rate that is lower than that of a developed country.(b) The populations of Europe and
Review the data on the demographic transitions for one developed and one less developed country. For instance, you could study the demographic transitions of England and Sri Lanka (see Gillis,
You are gathering demographic data in a village. You suspect that families have a gender bias; that is, they have children until a certain target number of sons are born, but you don’t have direct
This is a question on joint families, externalities, and fertility choice. Suppose that Ram and Rani are the heads of a nuclear family, making their fertility decisions. For simplicity, assume away
Here is more on gender bias. In many Southern Asian countries, there is evidence that the ratio of boys to girls is too high (see also Chapter 8). A ratio of 110 boys to 100 girls is not uncommon.
Discuss the impact of population growth on per capita income and its growth.
Review the concepts of formal and informal sectors. Explain why labor might receive better treatment (in pay or conditions of work) in the formal sector. How do you think such differentials persist?
Describe the two fundamental resource flows that link the agricultural sector with the industrial sector. Discuss the market forces that are relevant to the magnitudes of these flows.
Review the Lewis model of economic development. In particular, discuss the following concepts: agricultural surplus, average agricultural surplus, surplus labor, disguised unemployment, family
(a) Consider a family farm that is in the surplus labor phase. Now suppose that some members migrate to work elsewhere. Describe what happens to the average income of the family farm.(b) Reconcile
Present arguments why, all other things being the same, the industrial supply curve of labor is steeper, when the economy is closer to minimum subsistence to begin with. If food can be freely traded
Pim and her three sisters own a small farm in the agricultural sector of the land of Grim. They work equally hard, and the value of their output measured in the local currency, nice, is 4,000 nice,
Taxes on industrial profits will leave less room for capital accumulation and slow down the rate of growth. Do workers already employed in the industrial sector have an incentive to lobby for such
A farm household in rural Mexico consists of five adult brothers and no other dependents. Total annual income depends on the number of brothers working on the farm through the year and is given by
Are the following statements true, false or uncertain? Provide a brief explanation to back up your answer.(a) In the dual economy model, the phase of disguised unemployment must be associated with a
In the 1950s, facing massive unemployment in the cities (much of it disguised in the informal sector), the Kenyan government embarked on a “Keynesian” policy of creating new urban jobs through
Carefully review the different migration policies studied in this chapter. Explain under what circumstances the flexible equilibrium allocation is the efficient allocation and how different policies
(a) Calculate the expected values of the following lotteries:(i) 100 with probability 0.4 and 200 with probability 0.5(ii) 100 with probability p and 200 with probability 1 − p (evaluate the
A farming family owns some land. Suppose that in any year the equivalent of two people are needed to farm each acre of land that they own. The following information is given to you:(i) There are six
Suppose that two individuals A and B meet and undertake a joint project in which the returns are 1,000 with probability 0.5, and 2,000 otherwise. They are negotiating an agreement regarding the
(a) Generalize the setting in (1). There are ownership distributions for land, for labor, for bullocks, for access to working capital. Explain carefully how the operational distribution of land will
Compare and contrast the features of agrarian structure in Latin America and Asia, paying particular attention to the problem of land ownership.
(a) Show that in an economy with extensive possibilities for perfect crop insurance, fixed-rent tenancy must be dominant irrespective of whether potential tenants are risk-averse or
Consider a production cooperative with just two farmers. Each farmer chooses independently how much labor to supply to the cooperative. Each unit of labor is supplied at an opportunity cost of w.
It is not uncommon to observe that in sharecropping contracts with cost sharing, the cost share borne by the tenant is equal to the output share accruing to him (see, for instance, the box on
(a) Why might tenant laws that confer permanent use rights on a tenant who has farmed a plot of land for some years have counterproductive effects on the security of a tenant?(b) Explain why the
A widely observed feature of backward agriculture is the inverse relationship between farm size and productivity; that is, larger farms tend to produce lower output per acre than smaller ones. Brief
Consider various forms of land rights:(i) Communal ownership, (ii) Individual use rights without ownership, and (iii) Full ownership rights. Discuss how these rights affect the productivity of
Review the standard supply–demand model for the study of labor market equilibrium. Discuss some features of labor markets that require substantial extensions to, or changes in, the standard
In this question we review various aspects of the capacity curve.(a) Look at the energy balance equation (13.1) that we studied. Recall that it reads as follows:where x is energy input, r is resting
On a graph where the total income is on the horizontal axis and the number of tasks is on the vertical axis, why does the piece rate appear as a straight line? Show that if the piece rate goes up,
(a) We showed that with a large supply of labor (and with no long-term storage or borrowing effects), the equilibrium piece rate settles at the level where the line describing the piece rate is
Suppose that spot market wages fluctuate between the two values $50 and $100, each with probability 1/2. Suppose that a risk-averse worker dislikes fluctuations in income and wants to smooth out
Consider a second possible reason to hire permanent labor, which is to carry out tasks that cannot be easily monitored by the employer. In this case, the only punishment power that the employer might
This problem explores the way in which a shortage of food might act as a constraint to industrial employment and how the situation is affected by the presence of inequality. Suppose that an
If people have different costs of default, such that for each person there is a threshold repayment burden that they will always want to default upon, explain why loans above a certain size will
Explain the concept of a risk premium in words. This example will help you understand how a risk premium may be calculated. In each of cases (a)–(d), assume that you always have the option to keep
A risk-lover is an individual who prefers a lottery with some expected value to a fixed amount of money with the same value. Show that with limited liability, a risk-neutral or even a risk-averse
Carefully reproduce the example of a landlord lending to a laborer, where underpriced labor as well as interest can be charged as repayment for the loan. Show that the loan will be advanced at the
Here is another way to think about output–credit interlinkage between a trader and a farmer. Recall that the borrower–farmer maximizes his profit. Note that (i) marginal revenue equals price
Carefully reproduce the example of a trader lending to a farmer, where output sold by the farmer to the trader at a discounted price (as well as direct interest) can be required as repayment for
Do you expect that there will be a systematic discrepancy in interest rates between loans that are made for production purposes and loans that are given for consumption purposes? Analyze some sources
An expansion of credit from formal financial institutions to large informal lenders will increase competition among such lenders and improve the terms of credit for small borrowers with no access to
Consider a monopolist lender who lends to borrowers on a repeated basis. The loans are informal and are not backed up by written contracts. The lender has no way to recover a loan if the borrower
SelfHelp is a newly formed credit cooperative which receives partial financing from government banks. Members of SelfHelp can deposit savings with the cooperative and they can also turn to SelfHelp
A lending organization, inspired by the Grameen Bank, is attempting to provide loans to small farmers. It is lending to farmers in groups of two (say).(a) Provide at least two reasons why a strategy
Suppose that two persons, A and B, can each earn a high income(H) or a low income (L). The following table describes the probability of each of the four events. Make sure that you understand what
Discuss the main problems with agricultural crop insurance. Pay particular attention to the problems of correlation and information. Using these concepts, comment on the possibility of a twotier
Suppose that we find that temporary income shocks (such as those due to weather fluctuations) have small effects on the consumption of a household. Then this is prima facie evidence that households
Suppose that a household builds up stocks of assets, such as bullocks, land, jewelry, and cash. When faced with an adverse income shock in a particular year, the household will use these assets to
Consider two economies: one with a high population density, so that villages are clumped together and intervillage transportation costs are low, and another in which villages are spread apart and
Consider two groups of risk-averse farmers. One group practices mutual insurance, but the other does not. In the questions to follow, base your arguments on the assumption that a menu of production
Quite apart from considerations of altruism, discuss why insurance among members of an extended family is more likely than insurance among a group of strangers of the same size and occupational
We have seen that moral hazard restricts the scope of insurance: if unobserved effort must be expended to produce efficient levels of output, then such effort may not be forthcoming in the presence
Review the material on enforcement constraints in insurance. Why might higher mobility (of people) lead to a breakdown in mutual insurance?
Why might an increase in trade volume not correspond to an increase in hard-currency earnings? Illustrate your argument by using the example of a devaluation, which is a deliberate cheapening of the
Consider the Ricardian model of trade described in this chapter. Use Table 16.5 to answer the questions that follow.Table 16.5(a) Show that if the relative price of computers to rice were any amount
Here is another exercise on the Ricardian model: If less resources are used in country N to produce each of the goods, how is it that country S gets to export one of the goods? The answer is that
Per capita income is a measure of purchasing power. People who live and work in developing countries often find that their incomes are meager when buying an international airline ticket, making an
McDonald’s operates in various countries. It has been found that the relative price of a Big Mac is a better guide to the overall cost of living than estimates using the exchange rate. Why do you
Use Table 2.1 to construct what is known as a Kuznets ratio (named after the economist and historian Simon Kuznets): the ratio of incomes earned by the richest 20% of the population to the those
Why do you think that European or Japanese television transmits at resolutions that are superior to those in the United States? After looking into this question, formulate a hypothesis that suggests
Make sure you understand the power of exponential growth (and of rapid exponential inflation) by doing the following exercises:(a) How quickly will a country be growing at 10% a year double its
Construct an imaginary mobility matrix from a sample of countries that shows no mobility at all. What would it look like? What would a mobility matrix with “perfect mobility” look like? What
Think of various indicators of development that you would like to see in your concept of “economic development.” Think about why per capita income, as measured, may or may not be a good proxy for
A cogent example in which per capita magnitudes may be misleading if we do not have a good idea of distribution comes from the study of modern famine. Why do famines simply not make sense if we look
The best way to think about the Harrod–Domar equations is to attach some numbers to them. First, let us work with the simple Harrod–Domar equation (3.5). Imagine that a country has a national
(a) Why do you think population growth rates fall with development? If people consume more goods, in general, as they get richer and children are just another consumption good (a source of pleasure
A firm is set up to produce and sell cotton shirts. It buys plant and machinery for $2 million and land for $1 million, and constructs a warehouse for another $1 million. Each year, it hires 100
Suppose that the country of Xanadu saves 20% of its income and has a capital–output ratio of 4.(a) Using the Harrod–Domar model, calculate the rate of growth of total GNP in Xanadu.(b) If
(a) Suppose that as a professor in India my salary is rupees (Rs) 100,000 per year and that I get a raise of Rs 1,000 per year. Suppose that a schoolteacher who earns Rs 50,000 per year also gets
This is an exercise to understand the Solow model,(a) The economy of Ping Pong produces its GNP using capital and labor. The labor force is growing at 2% per year. At the same time, there is
Consider the model of endogenous population growth that we summarized in Figure 3.2.Figure 3.2.Suppose that the curve describing population growth rates always lies below the line describing growth
(a) Consider the Solow model. Show that savings rates and depreciation rates have only level effects on both per capita income and total income. What about the effect of population growth on per
Discuss whether the following statements are true or false.(a) The Harrod–Domar model states that a country’s per capita growth rate depends on its rate of savings, whereas the Solow model
Think about the model of human capital and growth introduced in this chapter. One useful feature of this model is that it simultaneously explains how rates of return to physical capital as well as

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