Study Guide to accompany Economic Development

Study Guide to accompany Economic Development Study Guide to accompany Economic Development Ramesh Mohan Copyright © 2005 E. Wayne Nafziger Economic Development. The contents or parts thereof, may be reproduced in print form solely for classroom use with Nafziger, Economic Development provided such reproduction bears copyright notice, but may not be reproduced in any other form without prior written consent of E.Wayne Nafziger or Cambridge University Press, in any network or other electronic storage or transmission, or broadcast for distance learning. Table of Contents PART I PRINCIPLES AND CONCEPTS OF DEVELOPMENT 1. Introduction 2. The Meaning and Measurement of Economic Development 3. Economic Development in Historical Perspective 4. Characteristics and Institutions of Developing Countries 5. Theories of Economic Development PART II POVERTY ALLEVIATION AND INCOME DISTRIBUTION 6. Poverty, Malnutrition, and Income Inequality 7. Rural Poverty and Agricultural Transformation PART III FACTORS OF GROWTH 8. Population and Development 9. Employment, Migration, and Urbanization 10. Education, Health, and Human Capital 11. Capital Formation, Investment Choice, Information Technology, and Technical Progress 12. Entrepreneurship, Organization, and Innovation 13. Natural Resources and the Environment: Toward Sustainable Development PART IV THE MACROECONOMICS AND INTERNATIONAL ECONOMICS OF DEVELOPMENT 14. Monetary, Fiscal, and Incomes Policy, and Inflation 15. Balance of Payments, Aid, and Foreign Investment 16. The External Debt and Financial Crises 17. International Trade PART VI DEVELOPMENT STRATEGIES 18. Development Planning and Policymaking: the State, and the Market 19. Stabilization, Adjustment, Reform, and Privatization Introduction ________________________________________________________________________ The textbook is organized into six parts. The first five chapters focus on principles and concepts of economic development. Chapters 6-7 examine income distribution, including a discussion of the distribution between urban and rural areas and the process of agricultural transformation. Chapters 8-13 analyze the role of population, production factors, and technology in economic development, with special emphasis in Chapter 13 on the environment and natural resources. Chapters 14-17 discuss the macroeconomics and international economics of development. Chapter 18 looks at planning for economic development, and Chapter 19 analyzes stabilization, adjustment, reform, and privatization. Fill-in Questions Davos ___________________________________ International Monetary Fund ___________________________________ less developed countries (LDCs) ___________________________________ policy cartel ___________________________________ Porto Alegre ___________________________________ World Bank ___________________________________ World Economic Forum ___________________________________ World Social Forum ___________________________________ Multiple-Choice Questions 1. Which of the following are not third-world regions? a. Latin America. b. Asia. c. Africa. d. Australia. 2. Which of the following are not third-world regions a. Taiwan. b. North Korea. c. Singapore. d. Hong Kong. 3. Which country is not a transitional economy a. China. b. Russia. c. Hungary. d. Mexico. 4. Development economics focuses primarily on the poorest ___________ of the world's a. population. b. two-thirds. c. one-third. d. 28 percent. e. 5 percent. 5. The poorest region of the world is a. the Middle East. b. sub-Saharan Africa. c. Asia. d. Latin America. 6. Of the world's population, what portion lives in developing countries? a. approximately 35%. b. approximately 80%. c. nearly 10 billion people. d. less than 1 billion people. 7. In which of the following countries would you expect material lifestyles to be most like those in the United States? a. Nigeria. b. Japan. c. India. d. Mali. 8. Compared to the income of the family of Balayya discussed in the text, the Smiths' family income was roughly a. twice as large. b. 10 to 12 times as large. c. 200 times larger. d. -three-fourths as large. 9. Which of the following could be considered critical questions in development economics? a. How do the poorest 2/3 of the world live? b. What are the major theories of economic development? c. What factors affect labor skills in the third world? d. all of the above are correct. 10. Which of the following characteristics are most likely found in developing countries? a. high population growth rates. b. large number of people living in poverty. c. very traditional methods of agricultural production. d. all of the above e. none of the above 11. Which of the following could not be considered a major economic system? a. capitalism. b. communism. c. socialism. d. physical quality of life index. e. none of the above. The Meaning and Measurement of Economic Development ________________________________________________________________________ Economic growth is an increase in a country's per capita output. Economic development is economic growth leading to an improvement in the economic welfare of the poorest segment of the population or changes in educational level, output distribution, and economic structural change. Although economists classify countries by income category, rankings by measures of the level of economic welfare form a continuum rather than a dichotomy. The third world of Africa, Asia, and Latin America is very diverse, ranging from the least developed countries with a low per capita income and little industrialization to newly industrializing countries. The GNP of LDCs is understated relative to that of the United States because LDCs have a higher portion of output sold outside the marketplace, a smaller share of intermediate goods in their GNP, and a large percentage of labor intensive, unstandardized goods having no impact on the exchange rate. The per capita GNP of LDCs relative to the United States increases by one and one half to more than four times when adjustments are made for purchasing power. Purchasing-power parity national income data are preferable, when available, because they are a more accurate reflection of relative welfare. Per capita GNP is an imperfect measure of average economic welfare in a country. For example, social indicators, such as the UNDP’s Human Development Index (HDI), suggest that Chile and Poland have done better in meeting the basic needs of the majority of its people than South Africa, which has roughly the same average income level. The Gender Development Index (GDI), which adjusts HDI for gender inequality, does better in reflecting the adverse effect of gender disparities on social progress. Economists who emphasize basic needs stress providing food, housing, health, sanitation, water, and basic education in LDCs, especially for low income groups. However, despite the view that these needs are rights, resources may be too limited in LDCs to guarantee their fulfillment. Some economists wish to substitute the goal of liberation, or freedom from external economic and political control, for that of economic development, which they understand as implying economic growth dependent on Western techniques, capital, institutions, and consumer goods. However, the countries they choose as examples fall far short of the liberation they espouse. Amartya Sen contends that freedom of choice is the ultimate goal of economic life. The relationship between incomes and achievements and between wealth and satisfaction with life may be weak, depending on factors other than income. Fill-in Questions Apartheid ___________________________ Asian tigers ___________________________ basic needs approach ___________________________ comparison resistant services ___________________________ developed countries (DCs) ___________________________ disparity reduction rate ___________________________ economic development ___________________________ economic growth ___________________________ economies in transition ___________________________ first world ___________________________ Fisher ideal index ___________________________ Gender-related Development Index (GDI) ___________________________ GDP (gross domestic product) ___________________________ GNP (or GNI) ___________________________ GNP (or GNI) per capita ___________________________ GNP (or GNI) price deflator ___________________________ high income countries ___________________________ Human Development Index (HDI) ___________________________ indicative planning ___________________________ International Comparison Project (ICP) ___________________________ international economic order ___________________________ Laspeyres price index ___________________________ least developed countries (LLDCs) ___________________________ low income economies ___________________________ middle income economies ___________________________ newly industrializing countries (NICs) ___________________________ OPEC ___________________________ (P) price level of GDP ___________________________ Paasche price index ___________________________ Physical Quality of Life Index (PQLI) ___________________________ Purchasing Power Parity (PPP) ___________________________ poverty weighted index ___________________________ real economic growth ___________________________ second world ___________________________ social democracy ___________________________ socialism ___________________________ third world ___________________________ UNCTAD ___________________________ World Trade Organization (WTO) ___________________________ world’s middle class ___________________________ Multiple-Choice Questions 1. Laspeyres type indexes use weights from a. current period b. base-period. c. forecasting d. future year 2. The formula to calculate Paasche price index is (o is the base year and n is the given year) a. P = ?Pnqn/?poqn b. P = ?Poqo/?pnqn c. P = ?Pnqo/?poqo d. P = ?Pnqn/?poqo 3. Tuvalu is composed of 9 coral atolls along a 360-mile chain in Polynesia. They gained independence in 1978. The former Ellice Islands are home to 9,700 people. If GNP of Tuvalu is $300 million in 2005, GNP per capita is a. 9700 *(1978 / 2005) b. 300/ 360 c. 300 000 000 / 9700 d. 32.333 4. If GDP for Barbados is $260 million in 2005 and its population is 260, 000, GDP per capita is a. 1000 b. 260 c. 0.001 d. 259740 5. If GNP per capita at constant prices for Liechtenstein a microstate of 29,000 people located on the Rhine River between Switzerland and Austria is US$555 and US$560 in 2004 and 2005 respectively, the real economic growth from 2004 to 2005 is a. 5% b. 0.901% c. 0.090% d. 0.991% 6. Economic growth from current year (c) to previous year (p) is given by a. [(GDPc – GDPp)/ GDPp]*100 b. [(GDPc – GDPp)* GDPp]*100 c. GNPc-(GDPp*100) d. [GDPp – GDPc]*100 7. All of the following are high-income countries except a. Singapore b. U.K c. Japan d. South Africa 8. Which of the following countries is not a low-income country? a. Indonesia b. India c. Malaysia d. Nigeria 9. Economic development refers to economic growth. economic growth plus changes in output distribution and economic structure. improvement in the well-being of the urban population. sustainable increases in Gross National Product. 10. If GNP for Vatican City, the smallest country in the world is 200 million euros in year 2001 and its population is 890, GNP per capita is a. 2000 - 890 b. 200/ 890 c. 200,000,000 / 890 d. 200 11. If GDP for Palau a small country near southeast of the Philippines is $130 million in 2002 and its population is 20,000, GDP per capita is a. 6500 b. 130 c. 0.0065 d. 650 12. If GNP per capita at constant prices for Ghana is US$360 and US$364 in 1996 and 1997 respectively, the real economic growth from 1996 to 1997 is a. 4% b. 1.11% c. 0.011% d. 11% 13. If GDP for Maldives is $435 million in 2002 and the GDP per capita is $1576.087, the population of the country must be a. 276,000 b. 1576.086 c. 0.276 d. 3.623 14. The formula to calculate economic growth from 2001 to 2002 is given by a. [(GDP2002 + GDP2001)/ GDP2001]*100 b. [(GDP2002 – GDP2001)* GDP2001]*100 c. [(GDP2002 – GDP2001)/ GDP2001]*100 d. [GDP2001 – GDP2002]*100 15. According to chapter 2 in the text, which of the following is true? a. The boundary between rich and poor countries has become clearer in 1990s. b. The fastest growing countries must be the ones with the highest-per capita GNP. c. A few poor countries like South Korea and Malaysia in the 1950s grew much more rapidly than some higher-income countries like Uruguay and New Zealand d. Today all high and upper-middle income countries are Western. 16. Which of the following countries is not a low-income country? a. Ethiopia b. Rwanda c. Somalia d. Singapore 17. All of the following are high-income countries except a. the United Kingdom. b. Singapore. c. Japan. d. Hungary. 18. Which of the following country is not a high-income country a. Canada. b. United States. c. Mexico. d. Australia. 19. All of the following are low-income countries except a. United Arab Emirates. b. Armenia. c. Sudan. d. Bangladesh. 20. One classification of development levels used by the World Bank divides countries into three group on the basis of GNP per capita. They are a. NIC, OPEC and G7 b. Low-income, middle-income and high-income c. Southeast, Northeast and Southwest d. Asia, America and Europe 21. The World Bank’s GNP per capita classification for low-income, middle-income and high income countries respectively is a. less than $900, $900-$9,000 and more than $9,000. b. less than $5,000, $5,000-$15,000 and more than $15,000. c. less than $100, $100-$1,000 and more than $1000. d. less than $50,000, $50,000-$150,000 and more than $150 000. 22. OPEC is the a. Organization of Petroleum Exporting Country. b. Organization of Pre- European Commission. c. Oil Producing Economies Caucus. d. Organization of Problematic Economies Committee. 23. The formula for the Laspeyres price index is (o is the base year and n is the given year) a. P = ?Poqo/?poqo b. P = ?Poqo/?pnqn c. P = ?Pnqo/?poqo d. P = ?Pnqo/?poqo 24. The Paasche index uses _______________ weights. a. current-year b. base-year c. fisher ideal index d. Purchasing Power Parity (PPP) 25. Which of the following is not a problem in comparing developed and developing countries’ GNP? a. GNP is understated for developed countries, since a number of items included in their national incomes are intermediate goods b. The economic contribution of a housewife in a peasant family may not be measured in GNP in poor country. c. GNP is understated for developing countries since many of their labor-intensive good have no impact on exchange rate since they are not traded. d. GNP is overstated for countries where the price of foreign exchange is less than market clearing price. 26. The University of Pennsylvania researchers Summers and Heston compute the price level of GDP as the ratio of purchasing power parity (PPP) exchange rate to the actual exchange rate where a. both exchange rates are measured as the domestic currency price of the US-dollar. b. both exchange rates are not converted into international dollars. c. both exchange rates are pegged. d. both exchange rate are converted into Big Mac PPP formula. 27. PPP is a. a theory that tells us that exchange rates between currencies are in equilibrium when their purchasing power is the same in both countries. b. GDP divided by exchange rate. c. a measure of income inequality. d. a measure of infant mortality in developing countries. 28. The Physical Quality of Life Index (PQLI) combines three indicators. They are a. infant mortality, life expectancy and adult literacy rate. b. crime rate, clean environment and quality of housing. c. air pollution rate, water pollution rate and sanitation. d. health, education and environment. 29. Infant mortality a. is defined as the annual number of deaths of infant under 1 year old per 1,000 live births. b. reflects the availability of primary education, the rights of employment and social security. c. is life expectancy up to age 3. d. reflects the availability of hospitals and childcare facilities, and the parents’ wealth. 30. INFANT MORTALITY LIFE EXPECTANCY ADULT LITERACY RATE The three measure of welfare indicators above comprise the a. Purchasing Power Parity. b. Physical Quality of Life Index. c. Human Development Index. d. The Laspeyres index. 31. The Human Development Index (HDI) summarizes a great deal of social performance in a single composite index, combining a. disparity reduction rate, human resource development rate and the composite index. b. longevity, education and living standard. c. minimum schooling, adult literacy and tertiary educational attainment. d. human resource training, development and R&D. 32. Longevity is a proxy for ___________ in the Human Development Index a. health and nutrition. b. living standard c. infant mortality d. Purchasing Power Parity 33. Which of the following is not one of the Newly Industrialized Countries (NICs)? a. Japan b. South Korea c. Taiwan d. Singapore 34. According to the text, basic needs include a. food, clothing and housing. b. health, education and quality housing. c. adequate nutrition, primary education, health, sanitation, water supply and housing. d. longevity and living standards. 35. Which of the following statement is not true about LDCs? a. Most LDCs have less than 1/10 the per capita GNP of the U.S. b. A greater share of GNP would have to be devoted to education to attain the same primary enrollment rates as in the U.S. c. Setting up western labor standard and minimum wages in labor-abundant LDCs is sensible. d. Most LDCs have a greater shortage of qualified teachers than the U.S. does. 36. Imitating labor standards from rich countries in LDCs may increase a. equality. b. poverty. c. employment. d. human development. 37. Which of the following did Mahatma Gandhi, non-violent politician and leader of India’s nationalist movement, not advocate? a. village economic development. b. handicraft production and labor-intensive technology. c. centralized decision making. d. reduction of material wants. Economic Development in Historical Perspective _______________________________________________________________________ Capitalism rose in the West from the fifteenth to eighteenth centuries with the decline of feudalism, the breakdown of church authority, strong nation states supporting free trade, a liberal ideology tailor made for the bourgeoisie, a price revolution that speeded capital accumulation, advances in science and technology, and a spirit of rationalism. In the last one to one and one-half centuries, sustained economic growth occurred primarily in the capitalist West and Japan. During this period, the economic growth rate of most of these countries was over 1.5 percent yearly. Thus the gap between these countries and the developing countries of Afro Asia has increased greatly. During the late nineteenth century, the Japanese acquired foreign technology, established a banking system, assisted private business people, aided technical improvement in small industry, implemented universal education, and kept foreign exchange rates close to market rates. However, LDCs can learn only limited lessons from Japan, because of its historically specific conditions and because some components of Japan’s model may have contributed to its recent growth collapse. The South Korean and Taiwanese approaches have been similar to those of Japan. Moreover, the Korean-Taiwanese model stressed government-business cooperation alongside government creation of contested markets among businesses. The 1917 Communist revolution in Russia provided an alternative to capitalism as a road to economic modernization. The state took control of economic planning and capital accumulation. In only a few decades, Soviet centralized socialism transformed Russia. Yet the major sources for this rapid growth, increased capital formation and increased labor participation rates, were exhausted in the decade or two before the collapse of communism in 1991. China performed better than Russia during its early industrialization, partly because of China’s institutional changes and market reforms. The economic growth of developing countries since World War II has been much more rapid than before the war. Yet the postwar growth of developing countries has been no faster than the growth of developed countries. Whether this means convergence or divergence depends on the time, scope, and definitions. In the last decades of the twentieth century, eight high-performing Asian economies have experienced rapid growth, despite the Asian financial crisis of 1997-1999. Since 1990, we can add India and other LDCs to this list. On the other hand, some sub-Saharan African and other LDCs have not only experienced a slowdown but a “meltdown,” resulting in declining health, nutrition, and other basic needs for most of the country’s people. Fill-in Questions Asian borderless economy ___________________________ Asian tigers ___________________________ ASEAN ___________________________ Bourgeoisie ___________________________ Bretton Woods international monetary system ___________________________ Capitalism ___________________________ Cartels ___________________________ Chaebol ___________________________ club convergence ___________________________ conditional convergence ___________________________ contested markets ___________________________ convergence ___________________________ divergence ___________________________ European Regional Development Fund ___________________________ Feld'man model ___________________________ Golden Age of Capitalist Growth ___________________________ Green Revolution ___________________________ G-7 ___________________________ import substitutes ___________________________ infrastructure ___________________________ Japanese development model ___________________________ Keiretsu ___________________________ labor participation rate ___________________________ laissez-faire ___________________________ modern economic growth ___________________________ monopsony ___________________________ perestroika ___________________________ Protestant ethic ___________________________ real domestic currency appreciation ___________________________ real domestic currency depreciation ___________________________ Stalinist development model ___________________________ Surplus ___________________________ terms of trade ___________________________ total factor productivity ___________________________ unconditional convergence ___________________________ zaibatsu ___________________________ Multiple-Choice Questions 1. How has the relative gap between GNP per capita for Western Europe and GNP per capita for African less-developed countries changed from the late nineteenth century to the present? a. declined. b. increased. c. remained the same. d. cannot be determined. 2. Keiretsu refers to a. groups of affiliated companies loosely organized around a large bank. b. horizontal manufacturing groups consisting of a core company and its partners. c. stateassisted entrepreneurs. d. financial cliques. 3. Asian tigers or newly industrializing countries (NICs) of East and Southeast Asia include the following except a. South Korea. b. China. c. Taiwan. d. Singapore. 4. During the first twenty-five years after World War II, industrialization in Korea and Taiwan benefited from the following except a. Japanese collaboration. b. United States aid. c. capital inflows. d. rapidly growing demand for manufactured goods in Asia. 5. The 1993 World Bank study entitled The East Asian Miracle (1993) identifies eight high performing Asian economies. Which of the following is not one of them? a. Japan. b. Four tigers. c. Vietnam. d. Thailand. 6. Korea’s keiretsu-like corporate conglomerates is known as a. zaibatsu. b. chaebol. c. laissez-faire. d. bourgeoisie. 7. On what did the Russian-Soviet development model of growth not depend? a. diverting savings from agriculture to industry. b. state-assisted entrepreneurs. c. state-monopolized trading. d. markets for allocating resources. 8. More than seventy percent of the population of fast growers lives in a. China. b. United States. c. Russia. d. Europe. 9. Based on the 2002 population survey, four of the five most populous countries include a. Russia, Pakistan, Bangladesh, and Nigeria. b. China, India, Indonesia, and Brazil. c. Russia, China, India, and South Africa. d. China, Russia, Mexico, and Indonesia. 10. Why has modern economic growth mainly been in western countries? a. a strong Catholic church intervention in the economic decisions. b. an emphasis on trade restrictions. c. the use of the medieval economy. d. the rise of capitalism. 11. Why has the growth of the German and Japanese economies after World War II not been repeated in LDCs? a. low interest rates. b. political instability inhibits world-wide investment. c. human capital or technical skills were lacking. d. real domestic currency depreciation exists. 12. Which two countries have enjoyed a real per capita growth rate of more than 7 % yearly since the 1960s? a. Ghana and Mexico. b. Canada and the United States. c. Sierra Leone and Nigeria. d. Taiwan and South Korea. 13. Perestroika in the Soviet Union refers to a. total market reliance for resource allocation. b. economic restructuring by Gorbachev. c. intensified central planning. d. none of the above. 14. Two countries that still rely on the Soviet communist model of development are a. Ghana and Nigeria. b. Poland and Germany. c. Cuba and North Korea. d. China and Hong Kong. 15. The bourgeoisie refers to a. the monarchy. b. the central planners of the Soviet Union. c. the capitalist and middle class. d. the aristocrats of wealthy nations. 16. ASEAN refers to the a. Association of South East Agro Nations. b. Association of South East Asian Nations. c. Alliance of South East Asian Neighbors. d. Alliance of South Eastern African Nations. 17. Based on Mankiw, Romer, and Weil (1992), with conditional convergence, holding fertility rates, education, and government spending as a share of GDP constant a. income per capita is the same regardless of poor or rich countries. b. income per capita in poor countries grows faster than in rich countries. c. income per capita in rich countries grows faster than in poor countries. d. income per capita in poor countries grows conditional upon foreign aid. 18. The 1993 World Bank study entitled The East Asian Miracle identifies eight high performing Asian economies. Which of the following is not one of them? a. Japan. b. The four tigers. c. Vietnam. d. Thailand. Characteristics and Institutions of Developing Countries ________________________________________________________________________ While LDCs are diverse, they have some common characteristics that especially apply to low income countries. Low income economies tend to have a high percentage of production and labor force in agriculture, low savings rates and technology, relatively rapid population growth, relatively low literacy and skills, and poorly developed institutions. While a disproportional proportion is not democratic, their political systems vary. Some lose substantial savings and income from widespread rent seeking, acquiring private benefits from public resources. A few, especially in sub-Saharan Africa, are failed states, providing virtually no public goods or services to their people. Despite this bleak portrait, LDCs generally have raised real incomes, reduced poverty, increased life expectancy, lowered infant mortality, improved literacy and educational access, narrowed gender disparities, and decelerated population growth, especially in the last half century. Fill-in Questions capital stock _____________________________ clientalism _____________________________ democratization _____________________________ dual economy _____________________________ European Union accession countries _____________________________ export commodity concentration ratio _____________________________ extended family _____________________________ failed states _____________________________ household responsibility system _____________________________ informal sector _____________________________ institutions _____________________________ inverted Ushaped curve _____________________________ nongovernmental organizations (NGOs) _____________________________ peasants _____________________________ political elite _____________________________ prebendalism _____________________________ predatory (neopatrimonial) rulers _____________________________ primary products _____________________________ property rights _____________________________ rent seeking _____________________________ social capital _____________________________ sustained development _____________________________ transparency _____________________________ value-added taxes (VAT) _____________________________ World Trade Organization (WTO) _____________________________ Multiple-Choice Questions 1. As economic development proceeds, income inequality tends to follow a(n) __________ curve a. convex. b. inverted U-shaped. c. L-shaped. d. S-Shaped. 2. Two or more nuclear families of parent(s) and children is known as a. dual family. b. institutional family. c. extended family. d. two-tier family tree. 3. Peasants are a. rural politicians. b. rural cultivators. c. rural industrialist. d. rural religious group. 4. Which of the following statement is true about low-income countries? a. less than 10% of the labor force is in agriculture. b. the average agriculture family produces surplus large enough only to supply a small non-agriculture population. c. one-third of the labor force produce food. d. share of labor force is about 30%. 5. A country’s capital stock is the a. approximated investment minus actual investment. b. inflow of investment from abroad. c. sum of previous gross investment minus depreciation. d. difference between GDP and capital consumption. 6. According to Lewis’s model, the dual economy grows only when a. the modern sector increases its output share relative to the traditional sector. b. agricultural sector uses modern equipment. c. agricultural sector hires labor economically. d. modern manufacturing sector is labor-intensive. 7. Export primary commodity concentration ratios are a. commodity exports as a percentage of GDP per capita of exporting country divided by importing country. b. export earnings as a ratio of population. c. total merchandise export divided by Gross National Income. d. food, raw materials, minerals, and organic oils and fat as a percentage of total merchandise exports. 8. The following statements are true about informal sector except a. Uses no mechanical power. b. May be enterprises with less than 10 workers. c. Production is capital-intensive. d. Uses family workers. 9. Economic rent a. is productive activity to obtain private benefit from public action and resources. b. is the payment above the minimum essential to attract the resource to the market. c. is the wage used to pay unskilled workers. d. does not include monopoly profits. 10. The informal sector includes I artisans, cottage industrialists, petty traders, tea shop proprietors. II garbage pickers, jitneys, unauthorized taxis, repair persons. III the self-employed. IV activities with little capital, skill, and entry barriers. a. I and II only b. III and IV only c. IV only d. I, II, III and IV 11. Clientelism I is also known as patrimonialism. II is the dominant pattern in many LDCs. III is a personalized relationship between patrons and clients. IV commands equal wealth, status, or influence, based on unconditional loyalties and involving mutual benefits. a. I and II only b. II and III only c. I, II and III only d. IV only 12. Which of the following is not a requirement for economic development? a. a temperate climate. b. natural resources. c. an adequate capital base. d. technological advance. 13. Which one of the following countries is not a high-income country? a. Germany. b. The United Kingdom. c. Canada. d. Mexico. 14. A country's export commodity concentration ratio is the a. average annual investment made in production of exported commodities. b. proportion of the primary export commodity in total exports. c. ratio of four leading commodities to total merchandise exports. d. total annual investment made in production of exported commodities. 15. Assume that the real income of a developing Island increases from $120,000 to $160,000 from 2005 to 2006, while its population expands from 1000 to 1100 during the same period. Real income per capita has increased by about a. $145. b. $40,000. c. $25. d. $100. 16. Increases in real GNP per capita occur when a. government programs direct resources away from investment goods to consumer goods. b. tariffs and quotas prevent countries from trading and thus prevent dollars from leaving each country. c. the rate of growth in real GNP is greater than the rate of growth in the population. d. the level of consumption expenditures rises relative to the level of saving. 17. In low-income countries, the average agricultural family produces a surplus a. enough to supply only a small non-agricultural population. b. of zero. c. large enough to feed five other families. d. large enough to feed 25 other families. 18. What is gross domestic product (GDP)? a. income earned through foreign exchange. b. the number of dollars earned in industry. c. income earned within a country’s boundaries. d. goods received from the nation’s local residents. 19. What is the ratio of population density of developing countries to the population of developed countries? a. 10. b. 2. c. no more than 1. d. 20. 20. Industrialization a. causes development. b. is positively related to development. c. is inversely related to development. d. inhibits development. 21. Dual economies are countries a. with double capital and labor/ b. with a modern manufacturing sector as well as traditional agriculture sector. c. that specialize in labor-intensive products more than capital-intensive products. d. with foreign-owned and domestically-owned capital. 22. The low-income economies generally have the following except a. deficient infrastructures. b. low life expectancies. c. low savings. d. a per capita GNP of more than $900. 23. A dual economy is distinguished from other economies by having a. an industrial sector and a manufacturing sector. b. a traditional agricultural sector and a modern industrial sector. c. state ownership of the means of production. d. an industrial sector that concentrates on manufacturing and construction. 24.Increases in real GNP per capita occur when a. government programs direct resources away from investment goods to consumer goods. b. tariffs and quotas prevent countries from trading and thus prevent dollars from leaving the country. c. the rate of growth of real GNP is greater than the rate of growth of population. d. the level of consumption expenditures rises relative to the level of saving. Theories of Economic Development ________________________________________________________________________ David Ricardo feared eventual stagnation from slow capital accumulation, and diminishing returns from population growth on fixed natural resources. However, he failed to see the possibility of sustained, rapid, economic growth because his theory understated scientific discoveries and technological progress. Marx saw history dialectically as progressing from feudalism to capitalism to socialism on the basis of class conflict. The oppressed classes overthrow the classes controlling the prevailing means of production. Rostow's economic model has five stages; its central historical stage is the takeoff, a decisive period of increased investment, rapid growth in leading sectors, and institutional change during which the major blocks to steady growth are finally overcome The vicious circle theory contends that a country is poor because its income is too low to encourage potential investors and generate adequate saving. Balanced growth advocates argue that a big push is needed to begin economic development because of indivisibilities in demand and infrastructure. Critics indicate that most LDCs do not have the resources essential for launching such a big push. Hirschman supports a deliberate unbalancing of the economy to facilitate economic decision making and investment. However he fails to stress the importance of agricultural investment. Kremer’s O-ring theory of development emphasizes that production consists of many tasks, all of which must be successfully completed for the product to have full value and to prevent coordination failure. In the Lewis model, an unlimited supply of surplus farm labor migrates to urban areas for wages in excess of rural, subsistence wages. This supply of cheap labor to the industrial sector is the basis for profits, and capital accumulation. Fei and Ranis, too, believe that the capitalist wage will increase before surplus labor is absorbed, unless agriculture and industry can achieve balanced growth. For Baran, the coalition of the bourgeoisie and landed classes, helped by foreign capitalist governments, is incapable of undertaking the capital formation and political reform required for rapid economic growth and alleviation of mass poverty. Furtado's dependency theory contends that increased productivity and new consumption patterns resulting from capitalism in the peripheral countries of Asia, Africa, and Latin America benefit a small ruling class and its allies. Frank's dependency approach maintains that countries become underdeveloped through integration into, not isolation from, the international capitalist system. The neoclassical counterrevolution to Marxian and dependency theory emphasized reliance on the market, private initiative, and deregulation in LDCs. Neoclassical growth theory emphasizes the importance of increased saving for economic growth. The new endogenous growth theory arose from concerns that neoclassical economics neglected the explanations of technological change. Fill-in Questions Accelerator ____________________________ backward linkages ____________________________ balanced growth ____________________________ big push thesis ____________________________ classical theory ____________________________ closed economy ____________________________ commercialization (turning) point ____________________________ demonstration effect ____________________________ dependency theory ____________________________ economic liberalism ____________________________ endogenous ____________________________ external economies ____________________________ forward linkages ____________________________ historical materialism ____________________________ human capital ____________________________ ICOR (incremental capital output ratio) ____________________________ Indivisibilities ____________________________ Infrastructure ____________________________ Innovation ____________________________ institutional wage ____________________________ International Monetary Fund (IMF) ____________________________ invisible hand ____________________________ iron law of wages ____________________________ labor supply elasticities ____________________________ laissez faire ____________________________ law of diminishing returns ____________________________ Lewis-Fei-Ranis model ____________________________ neoclassical counterrevolution ____________________________ neoclassical theory of growth ____________________________ neoclassicism ____________________________ endogenous growth theory ____________________________ OECD ____________________________ O-ring theory of economic development ____________________________ preconditions stage ____________________________ price elasticity of demand ____________________________ production function ____________________________ reserve army of the unemployed ____________________________ surplus ____________________________ unbalanced growth ____________________________ vicious circle ____________________________ virtuous circle ____________________________ Washington consensus ____________________________ World Bank ____________________________ Multiple-Choice Questions 1. One criticism of Rostow's theory of economic growth is that a. much available data contradicts his thesis about the takeoff stage. b. there is no explanation of why growth occurs after takeoff. c. his hypothesis of the stages of growth is difficult to test empirically. d. all of the above are correct. 2. Criticisms of Rostow's stages of development include a. the difficulty of testing the stages scientifically. b. conditions for takeoff are contradicted by historical evidence. c. characteristics of one stage are not unique to that stage. d. all of the above are correct. 3. According to the supply side of the vicious circle theory of development, a country is poor because a. technology levels do not allow for self-sufficiency. b. it was previously too poor to save and invest. c. underemployment is too widespread. d. resource allocation is poor. 4. Baran's Neo-Marxist thesis has been criticized for ignoring the probability that power is frequently a. based on an alliance between landowners and peasants. b. based on an alliance between peasants and the foreign bourgeoisie. c. transferred from one elite to another when revolution occurs. d. derived from domestic opponents of nationalism. 5. The vicious circle theory states that a. growing government assistance create addiction to welfare programs. b. low income levels create pressure for money creation. c. low income levels create pressure for cheap imports. d. low per capita income creates low savings that keep incomes low. 6. The Harrod-Domar growth model suggests that growth is a. directly related to savings and inversely related to the capital/output ratio. b. directly related to the capital/output ratio and inversely related to savings. c. indirectly related to savings and the capital/output ratio. d. directly related to savings and the capital/output ratio. 7. Surplus labor theories assume that a. LDCs are overpopulated. b. labor contributes nothing to output in LDCs. c. the marginal product of labor is close to zero in LDCs. d. urban unemployment is high in LDCs. 8. A theory I is a systematic explanation of relationships between economic variables. II explains causal relationships among variables. III provides a basis for policy. IV provides an explanation of all factors influencing economic growth. a. I only. b. I and II only. c. I, II and III only. d. IV only. 9. During the 1980s and 1990s, a period of economic conservative governments in much of the West and Japan, a leading approach among development economists was a. neoclassicism. b. Marxism. c. Rostow’s model. d. the classical approach. 10. Which of the following was not a classical economist? a. Adam Smith. b. Thomas R. Malthus. c. John Stuart Mill. d. John Maynard Keynes. 11. Adam Smith advocated I laissezfaire. II the invisible hand. III free-trade policy. IV competitive markets. a. I and II only b. II and III only c. I, II and III only d. I, II, III and IV 12. Karl Marx's historical materialism views were shaped by all of the following EXCEPT a. the French Revolution. b. the rise of industrial and capitalist production. c. political and labor revolts. d. a growing spiritual rationalism. 13. Feudalism was undercut by I the migration of serfs to the town. II factory competition with handicraft and manorial production. III expanded transport, trade, discovery, and new international markets. IV the rise of the business corporation. a. I and II only b. II and III only c. I, II and III only d. IV only 14. Rostow's economic stages are a. the preconditions for takeoff, the takeoff, the drive to maturity, and the age of creative destruction. b. the traditional society, the preconditions for takeoff, the takeoff, the drive to maturity, and the age of high mass consumption. c. the preconditions for consumption, the replication, the drive to maturity, and the age of high mass consumption. d. the learning curve, the age of high mass consumption, post-takeoff, and the drive to maturity. 15. The vicious circle theory indicates that a. a country is poor because it has lower productivity but high savings. b. as countries grow richer, they save less. c. poverty perpetuates itself in mutually reinforcing circles on supply and demand sides. d. market size is large in LDCs. 16. The synchronized application of capital to a wide range of different industries is called _______________ by its advocates. a. balanced growth. b. capitalization. c. elasticity of capital. d. indivisibilities. 17. For Rosenstein-Rodan a major indivisibility is in a. supply. b. infrastructure. c. agriculture. d. services. 18. A major dependency theorist, Andre Gunder Frank suggests that the following economic activities have contributed to underdevelopment: I Workers migrating from villages to foreigndominated urban complexes. II Forming an unskilled labor force to work in factories and mines and on plantations. III Replacing indigenous enterprises with technologically more advanced, global, subsidiary companies. IV Closing the economy to trade with, and investment from, developed countries. a. I and II only. b. II and III only. c. I, II and III only. d. I, II, III and IV. 19. OECD stands for a. Organization for Economic Cooperation and Development. b. Oil Exporting Countries’ Development. c. Organization for Environmental Cooperative Department. d. Open Economies’ Caucus on Development. 20. What is Baran’s explanation for underdevelopment in Asia, Africa, and Latin America? a. monopolistic business from abroad. b. reactionary ruling coalitions. c. weak domestic middle class. d. all of the above. 21. The Lewis model explains how growth gets started in a less developed economy a. with an average product of labor in agriculture that is negative. b. with a downward-sloping supply curve of labor. c. with a marginal productivity of labor zero or negligible in industry. d. with a traditional agricultural sector and an industrial capitalist sector. 22. The essential difference between capitalism and socialism is that a. capitalism exploits the worker and socialism exploits the property owner. b. capitalism relies on the market to make economic decisions and socialism uses central planning. c. capitalism grows through rent seeking and socialism grows through government direction. d. capitalism relies on consumer satisfaction to dictate choices and socialism relies on producer satisfaction. 23. The ultimate effect of the "invisible hand" of Adam Smith is that, in a competitive economy, everyone a. benefits if each acts in his/her own interest. b. will increase their profits in a free market. c. should act to maximize economic growth. d. should act to promote the public interest. Poverty, Malnutrition, and Income Inequality ________________________________________________________________________ Poverty is multidimensional, referring not only to low income but also to hunger, illiteracy, poor health, inadequate infrastructure, and lack of power and voice Absolute poverty is below the income that secures the bare essentials of food, clothing, and shelter. The World Bank and other international agencies have drawn $1/day and $2/day poverty lines, based on 1985 purchasing power parity (PPP). Sala-i-Martin, who interpolates income distribution by percentiles rather than by the World Bank’s quintiles, estimates that 6.7 percent of the world was suffering $1/day poverty and 18.6 percent $2/day poverty in 1998. The overwhelming majority of the world’s poor live in sub-Saharan Africa, South Asia, and East Asia. Sala-i-Martin and Bhalla show that the world’s individual income inequality fell from 1980 to 2000, a result of a shift of large numbers in high-populated Asia, especially in China and India, from the world’s lower to middle class. Sen's concept of poverty focuses on capabilities rather than attainments. Sen argues that policy makers need the following measures of poverty: headcount or poverty percentage, income-gap or the additional income needed to bring the poor up to the level of the poverty line, and Gini coefficient or concentration of income among the poor. Inequality tends to follow an inverted U shaped pattern, first increasing and then decreasing with growth in per capita income. People in absolute poverty are undernourished and have low resistance to disease. A high infant mortality rate, a life expectancy of about 45 years, and illiteracy characterize this group. Growth rates of national income are closely correlated with the income growth of the poorest 20 percent. Taiwan's and South Korea's stress on land reform, education, and labor intensive manufacturing, and Indonesia's emphasis on rural development have succeeded in increasing the income shares of the poorest segments of their populations. India’s poverty rates fell rapidly from the mid-1980s through the 1990s, when liberalization reforms spurred growth. Policies used to reduce poverty and income inequality include credit for the poor, universal primary education, employment programs, rural development schemes, progressive income taxes, food subsidies, health programs, family planning, food research, inducements to migration, income transfers, affirmative action programs, targeting programs for the poorest groups, and workfare schemes for which only the poor will qualify. Economists disagree on whether there is a tradeoff or interlink between equality and growth. Poverty and inequality increase the risk of war, state violence, and rebel resistance in LDCs. Fill-in Questions absolute poverty ___________________________ Adelman-Morris theory of growth and inequality ___________________________ adjustment ___________________________ capability ___________________________ concessional lending ___________________________ crowding ___________________________ cumulative distribution function ___________________________ elasticity of propoor growth ___________________________ elasticity of the poverty gap ___________________________ Gini coefficient ___________________________ Grameen Bank ___________________________ Green Revolution ___________________________ group lending ___________________________ headcount approach to poverty ___________________________ income-gap approach to poverty ___________________________ international balance on goods and services ___________________________ International Development Association ___________________________ International Monetary Fund ___________________________ inverted U shaped curve ___________________________ Kuznets curve ___________________________ Lorenz curve ___________________________ Microenterprises ___________________________ “missing” women ___________________________ $1 per day poverty ___________________________ patron-client systems ___________________________ poverty line ___________________________ relative deprivation ___________________________ standard deviation ___________________________ terms of trade ___________________________ $2 per day poverty ___________________________ Variance ___________________________ Workfare ___________________________ World Bank ___________________________ Multiple-Choice Questions 1. The Human Development Report 2003, which assumes that poverty is multidimensional, calculates a human poverty index based on which of the following measures of deprivation: I probability at birth of not surviving to age 40. II adult illiteracy rate. III negative economic growth. IV lack of a decent standard of living. a. I and II only b. III and IV only c. I, II and III only d. I, II and IV. 2. According to Human Development Report 2003, about_______ countries were poorer in 2003 than in 1990. a. 50. b. 100. c. 1000. d. 5. 3. _____________is below the income that secures the bare essentials of food, clothing, and shelter. a. Income inequality. b. Absolute poverty. c. Sen’s poverty index. d. Purchasing-power poverty. 4. Sen's welfare theory relies on a. individuals' accomplishments. b. individuals' capabilities. c. individuals' wealth. d. individuals' education. 5. Indices of income distribution measure a. absolute poverty. b. economic growth. c. relative poverty. d. standard of living. 6. Income inequalities are often shown on a a. production possibility curve. b. marginal inequality curve. c. Sen curve. d. Lorenz curve. 7. A value of 1 in Gini index represents a. low inequality. b. maximum inequality. c. 10/10, 000% inequality. d. 1% inequality. 8. The elasticity of propoor growth is a. the percentage increase in the consumption growth of the poor divided by percentage increase in the consumption growth of the nonpoor. b. the percentage increase in the poor times percentage increase in the nonpoor. c. the percentage increase in the poverty of the poor divided by percentage increase in the poverty of the nonpoor. d. the percentage increase in the poor people in the urban divided by percentage increase in the nonpoor in the urban. 9. In 2003, the UN Development Program estimated that a 1-percent LDC per capita consumption growth, with income inequality unchanging, would reduce the poverty percentage by _________ percent yearly. a. 0. b. 2. c. 6. d. 0.5. 10. The elasticity of the poverty gap with regard to the Gini index is (where H is the poverty percentage and G is the growth) a. b. c. d. 11. Which of the following statements are true about income inequality in developed and developing countries. I 27 percent of the developing countries have low inequality. II The majority of developed (high-income) countries have high income inequality. III The income shares of the poor are lower and their variance higher in DCs than in LDCs. a. I only b. II only c. I and II only d. I, II and III 12. The Lorenz curve shows a. patterns of poverty between developed and developing countries. b. the change in GDP per capita over time. c. the poorest’s income shares fall in the early stages of growth. d. income concentration relative to a 45-degree line. 13. “Peer borrowing groups of five or so people with joint liability approve loans to other members as a substitute for the bank's screening process”. The above statement applies to a. Indonesia's Badan Kredit Kecamatan (BKK). b. the Association for Development of Microenterprise. c. Bangladesh’s Grameen Bank. d. the Enterprise Credit Program in Kolkata. 14. Sala-i-Martin interpolates income distribution by a. quintiles. b. percentiles. c. simulation. d. relative ratio measures. Rural Poverty and Agricultural Transformation ________________________________________________________________________ Rural inequality is probably less than urban inequality in LDCs as a whole, especially in Afro-Asia. Nevertheless rural populations have a higher percentage in poverty than urban populations, because of much lower average incomes in rural areas. Households headed by women form a disproportionate share of the rural poor. Two-thirds of Sub-Saharan Africa's rural population (with the highest poverty rate) and more than one-half of Latin America's rural population live in poverty. Asia has the largest absolute number of rural poor but the lowest rural poverty rate among LDC regions. Because of high levels of capital accumulation, technical knowledge, and worker productivity, agricultural output per worker in developed countries is about 25 times as high as in developing countries. Subsistence farming dominated LDC agriculture in the past. With globalization, a larger proportion of LDC farm ouput is contracted with multinational corporations. Agricultural economists noticed a fall in global average foodgrain production during the late 1980s and early 1990s. Entitlement refers to the set of alternative commodities that a person can command in a society using the totality of rights that he or she possesses. Colonial and postcolonial policies biased against agriculture helped contribute to sub Saharan Africa's decline in food output per capita from the early 1950s to the early 1990s. Africa's food security is low because of substantial fluctuations in domestic production and foreign-exchange reserves, reductions in food aid, and lack of a Green Revolution in most of the continent. Inadequate capital , lack of technology, low educational and skill levels, the brain drain to urban areas, food price policies, below market foreign exchange rates, and governmental urban bias contribute to low incomes in rural areas. In LDCs, the small family farm is best positioned to have high productivity per hectare, at least if credit, extension, and inputs are readily accessible. Collective farming has not generally increased productivity because of disincentives for work, innovation, and savings. Production oriented rural development projects such as small farmer credit, agricultural innovations and new technology, and improved extension services are likely to reduce agricultural terms of trade and thus reduce rural incomes in the short run. Agriculture biotechnology has substantial potential to increase yields per hectare and per person in developing countries. Fill-in Questions Cooperative ___________________________________ elasticity of supply ___________________________________ entitlement ___________________________________ foodgrain (cereals) deficit ___________________________________ food security index (FSI) ___________________________________ household responsibility system ___________________________________ import substitutes ___________________________________ kulak ___________________________________ latifundios ___________________________________ minifundios ___________________________________ peasant farming ___________________________________ property rights ___________________________________ real exchange rate ___________________________________ sharecropping ___________________________________ ujamaa ___________________________________ urban bias ___________________________________ Multiple-Choice Questions 1. Which of the following is not true about most farmers in LDCs? a. The staple crop is the chief source of food. b. Labor is underutilized except for planting and harvesting seasons. c. On the traditional farm, output is always greater than consumption. d. Cultivators farm only as much land as their families can work without hired labor. 2. Which of the following is not true about the specialized farm? a. Such a farm is the most advanced agricultural phase in a market economy. b. Such a farm usually emphasizes cultivating one crop. c. Such a farm is labor intensive. d. Such a farm uses advanced technology, and takes advantage of economies of scale. 3. Which of the following is not a consequence of growing agricultural commercialization? a. An increase in the number of landless laborers. b. An increase in rural poverty. c. Women gain in decision making power. d. Workers’ nutrition is reduced. 4. Which scholar argues the following: “Plantations have no significant advantage over peasants [for] crops for which centralized processing and marketing are not necessary. Cocoa and coconuts are typical examples of a lack of large-scale economies. Peasants can grow and process these crops in small lots with no large capital requirement beyond small indigenous tools and facilities.” a. Yujiro Hayami. b. Raanan Weitz. c. Hans Singer. d. Tim Dyson. 5. Which of the following statement about rural and agricultural development is true? a. Rural development is the same as agricultural development. b. The agrarian community requires a full range of services such as schools, merchants, banks, and so on. c. Household nonfarm income is uncorrelated to farm productivity and household incomes in Kenya. d. China's rural population receives little income from nonfarm income. 6. Which of the following is not a major factor raising LDC agricultural labor productivity? a. new biological-chemical-mechanical inputs in production. b. new technical and organizational knowledge from greater specialization. c. expanded markets for agricultural output. d. massive government intervention. 7. Which of the following is not among the most advanced global food chain cluster with headquarters in the US. a. Cargill/Monsanto. b. ConAgra. c. Novartis/ADM. d. Procter & Gamble. 8. Which index "combines measures of calorie availability (in relation to requirement), the growth of per capita daily energy supply, food production, food staples self-sufficiency, and variability of food production and consumption"? a. food sufficiency index. b. food security index. c. food self-intake index. d. food growth index. 9. Which of the following is NOT a cause of food insecurity, according to Nic Maunder, a specialist on Ethiopia? a. War and bad governance. b. Corruption and mismanagement. c. Poor roads. d. Aid from developed nations. 10. Which of the following colonial policy contribute further to today's agricultural underdevelopment in Africa? I Colonial governments compelled farmers to grow selected crops. II Colonialism often changed traditional land tenure systems from individual control to communal. III Colonialists failed to train African agricultural scientists and managers. IV Research and development concentrated on food production and small farmers and herders. a. I and II only. b. I and III only. c. III and IV only. d. II and III only. 11. A set of alternative commodity bundles that a person can command in a society using the totality of rights and opportunities that he possesses is known as a. production possibilities. b. entitlement. c. income distribution. d. egalitarianism. 12. Amartya K. Sen emphasizes that having enough to eat depends on a. society's system of entitlement. b. an egalitarian income distribution. c. low poverty rates. d. society's high Gini concentration. 13. In a food demand growth equation, D = ? + E, is the income elasticity of demand for food, E is the per capita income growth, and ? is a. poverty rates. b. food security index. c. change in the quantity of food demanded per capita. d. population growth. 14. Which of the following is a form of urban bias? I Government may set price floors on food and price ceilings for industrial goods. II Tax incentives and subsidies to infant-industry. III Tariff and quota protection for industry. IV Spending more for education, training, housing, health and transport in urban areas than in rural areas. a. I,II, III only. b. I, II and IV only. c. II, III and IV only. d. I, II, III and IV. 15. Most of Latin America has been characterized by________, large landg