AMERICAN UNIVERSITY
Department of Economics
Comprehensive Examination
Development Economics
January 2015
Page 1 of 5
Directions: Answer a total of four (4) questions; choose two questions from Part 1 and two
from Part II. Be sure to follow the instructions given.
PART 1: Development Microeconomics
Answer one question from Section A and one question from Section B. Read the questions
carefully, and make sure to answer what is asked. Answers are judged on clarity of
exposition and intuition, command of the relevant literature, and accuracy and depth of
technical detail.
Section A: Answer one question.
Question A1:
a) Debraj Ray points out that poverty is about: “ the degradation, the indignity, and the
dehumanization of utter economic deprivation” (Ray 1998, p. 267). Why do we want to measure
it in any case? Critically discuss the advantages and disadvantages of the varied measures of
poverty and explain why overall, they still miss out in capturing those who are poor.
b) Can one introduce intrahousehold allocation in the household model and still retain Paretooptimal efficient outcomes similar to that of the unitary household model? Demonstrate by
means of an example, making use of graphs and/or equations where relevant. From a
methodological standpoint, what makes the test of intra-household dynamics and allocation
models particularly challenging? Justify your answer by using any of the empirical studies to
illustrate your point.
c) What new insights on economic issues and concerns are provided by the body of knowledge
called feminist economics? Put in another way, what challenges does an understanding of gender
offer to the accepted wisdom or commonplace notions in economics discipline? Give examples
to illustrate your points.
Question A2:
a) Explain the notions of “identity” and “methodological individualism”? How do these
concepts relate to the microeconomic approach towards understanding economic development?
b) Discuss the underlying premises, main features and predictions of the agricultural household
model (AHM) under incomplete or missing market assumptions and compare it with the CarterKatz separate spheres and conjugal contract model. With regards to the latter, what does it
reveal about the nature of intrahousehold dynamics and bargaining processes? Make use of
graphs and/or equations to illustrate your arguments
c) What new insights on economic issues and concerns are provided by the body of knowledge
regarding environmental sustainability? Put in another way, what challenges does an
understanding of the environment issues offer to the accepted wisdom or commonplace notions
in economics discipline? Give an example from the literature to illustrate your points.
Question A3:
a) What does Sen mean by saying that poverty is more than just insufficient income to buy
basic needs, rather, it involves ‘capability deprivation’? In what ways do the standard measures
of poverty miss out in capturing those who are poor?
b) Inequality is challenging and difficult to measure. Why do we want to measure it anyway and
how is it related to poverty? In your answer, critically discuss the recent developments in the
estimation of global inequality. What trends have been observed? What explains why a country
like Chile that has experienced significant economic growth and poverty reduction can still have
persistent high inequality?
c) Discuss the reasons why development microeconomists in recent years have rejected both: a)
the simple model of the (agricultural) household (AHM), and b) the standard (Walrasian) labor
market model particularly as theoretical framework for empirical research. Demonstrate your
arguments for each of these models by: ( i) critically discussing the main assumptions that
underlie these models and that development economists find problematic, and (ii) supporting
your arguments with the findings of an empirical study on the subject.
Section B: Answer one question.
Question B1:
a) Discuss carefully the role that risk play in the lives of the poor and explain why policymakers
should address this concern in designing policy or programs. Demonstrate, using a concrete
example from the literature, how risk coping or mitigating strategies used by households
affect their behavior or response to income shortfalls or economic crises.
b) What is meant by the term “flexibilization of labor markets” and what factors have brought
this about? Discuss carefully any gender dimensions regarding the patterns and terms of
employment in both the formal and informal labor markets.
b) How useful is the Harris-Todaro framework in understanding migration patterns, whether
they be internal (rural-urban) or international migration? Be sure to discuss the main assumptions
as well as key predictions of the model by means of graphs and/decision equation. What other
factors influence a person’s decision to migrate and which are not captured by the Harris-Todaro
migration model?
Question B2:
a) Consider a poverty alleviation program that provides conditional cash transfers. What are the
difficulties in identifying the impact of this program on poor households? Given these
difficulties, how you would go about empirically investigating if such a program has improved
the welfare of the recipient and her household or not?
b) Carefully explain the case of a trader lending to a farmer, where the output sold by the farmer
to the trader at a discounted price can be required as payment for the loan. Show that the loan
will likely be advanced at an interest rate lower than the opportunity cost of funds for the trader
c) Carefully explain Amartya Sen’s approach in analyzing why hunger and famine takes place
and how it differs from the conventional view of the causes of hunger and food insecurity. Make
use of graphs and economic reasoning in your answer. How would you go about empirically
examining the causes and consequences of hunger or food insecurity? What kind or type of data
would you gather and use?
Question B3:
a) What are the limitations of informal insurance schemes? Discuss the factors that might limit
the ability of households in a village to insure one another.
b) What is the relationship between poverty and vulnerability? Discuss the varied mechanisms
for measuring vulnerability. If you were to conduct an empirical assessment of the effects on
vulnerability, what challenges do you face? Provide examples to illustrate your points.
c) You are assigned to evaluate the effects of a poverty-alleviation strategy on any one (1) of the
following concerns: i) growing inequality, or ii) increased vulnerability. Using a specific
poverty alleviation scheme as a case in point, write a work plan which identifies:
i) the relevant indicators and measurements you would use and,
ii) the critical social and political dimensions of markets (or a market economy) that are
likely to affect the outcome of the poverty alleviation scheme.
PART 2. Development Macroeconomics
Answer one question from Section A and one question from Section B. Read the questions
carefully, and make sure to answer what is asked. Answers are judged on clarity of
exposition and intuition, command of the relevant literature, and accuracy and depth of
technical detail.
Section A: Answer one question
Question A1: Growth Models
a.
Explain the basic assumptions of the Solow growth model. Provide algebraically the key
equilibrium condition and illustrate the result diagrammatically.
b.
explain or show the key dynamic properties of capital and show diagrammatically why
the equilibrium is stable.
c.
Explain the main differences of endogenous growth theory from the Solow model.
d.
Using the Solow growth model, show the combined effect of an increase in population
growth rate and increase in the savings rate on the equilibrium capital to output ratio and
steady-state growth.
Question A2: Empirical Analytics of Growth
a.
Considering Mankiew, Romer, and Weil’s paper testing the Solow model and
endogenous growth theories, explain the difference between absolute and conditional
convergence and indicate what evidence they found.
b.
Considering Bosworth and Collins’ paper contrasting sources of growth in India and
China, explain the basic growth accounting approach they use and the key differences
they found between India and China.
c.
Considering Acemoglu, Johnson, and Robinson’s paper on institutions and growth,
describe the empirical evidence they use to prove their hypothesis. Is it convincing? Why
or why not?
d.
Considering Burnside and Dollar’s approach to examining the relationship between aid
and growth, provide an empirical setup that provides a means to test this relationship and
define your variables and explain how your setup is derived from theory. Explain what
results you expect to get and any econometric complications.
Section B: Answer one question.
Question B1: Monetary and Foreign Exchange Regimes
You are asked to provide advice to a low middle-income country on the monetary and foreign
exchange regimes that it should adopt. The country has a poorly developed financial market and
with a ratio of money to GDP of 30 percent; the government has a chronic deficit but is not
allowed to borrow directly from the central bank to finance its deficit. The country mainly
produces for export cocoa but has some limited manufacturing and imports a significant amount
of food and fuel.
a.
What would you recommend for a monetary regime, a reserve or broad money-based
regime or inflation targeting? Explain your reasoning fully, including any additional
assumptions you make to present a case for one or the other regime.
b.
What would you recommend for a foreign exchange regime: fixed, floating, or in
between? Explain your reasoning and provide at least two characteristics of the economy
that influence your recommendation.
c.
What would be a sensible level of international reserves for this country to target?
Explain your reasoning.
d.
You are asked to assess whether this country’s real exchange rate is in equilibrium.
Describe three different methodologies to assess whether the real exchange rate is
properly valued.
Question B2: Exchange regimes and currency crises.
a.
Describe the key criteria for choosing an optimal foreign exchange regime for a country.
Then carefully discuss when a fixed exchange regime is likely to be optimal for a
country, and when a floating regime is likely to be optimal.
b.
Compare two major emerging markets and explain what exchange regime they have and
whether this regime seems optimal for this country and why.
c.
Explain the key ideas of Krugman’s first generation models of currency crises. Then
choose a country whose recent experience most approximates the Krugman model
and explain why.
d.
Describe two empirical approaches that have been used or could be used to forecast
sudden reversals of capital flows or currency crises and then indicate key variables in
explaining why a country has a sudden stop or a currency crisis.