AMERICAN UNIVERSITY
Department of Economics
Comprehensive Examination- Development Economics
June 2012
Directions
Answer two (2) questions from each of the two parts—development microeconomics
and development macroeconomics—for a total of four (4) questions.
Be sure to pace your answers within the given time constraint.
Read the questions carefully and make sure to answer what is asked.
Answers are judged on clarity of exposition, command of the relevant literature,
and accuracy and depth of technical detail.
Use diagrams and equations if helpful but be sure to label them.
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PART 1. Development Microeconomics
Answer two of the five questions from this part.
1. Agricultural households
a) Explain the distinction between an agricultural household model in which production and
consumption decisions are separable and a model in which these decisions are nonseparable. Describe how you would empirically test for separability in agricultural
household decision-making. Does the rejection of global separability necessarily imply that
that decision-making in all households are separable? Explain.
b) Explain how the presence of transaction costs create a situation in which some staple
producers buy, some sell and others remain self-sufficient. In the presence of such
transaction costs, how should supply response be estimated? If transaction costs influence
staple production in the manner described, what are the implications for policies (such as
trade policies) that affect the price of staple goods?
2. Education
a) Countries often attempt to improve education outcomes by investing in a substantial school
expansion in a relative short period of time. Suppose a country underwent a substantial
expansion in secondary schools two decades ago and you would like to determine the longterm effects of this expansion on education outcomes, the probability of being employed,
and income earnings. Assuming you have detailed household- and individual-level cross
sectional data from a recent year, discuss step-by-step how you would go about testing
whether the previous investment in secondary school had an impact on the chosen
indicators. In answering, be sure to discuss what additional information you would need to
collect and how you would conduct the analysis.
b) Suppose a government would like to experiment with different types of secondary school
scholarship programs to improve schooling outcomes. The scholarships would be provided
to 20% of students coming out of primary school but the manner in which they will be
allocated would be up to you. They specifically ask that programs are designed in such a
way as to maximize student achievement across the board—for those that will and will not
receive the scholarship. Describe three possible approaches to providing the scholarships
and why you think these approaches would be successful in inducing better schooling
outcomes. Discuss how you would go about determining if any of these approaches work
and which is most effective.
3. Fertility
a) Explain the theory of household fertility decision making. What factors does the theory
indicate are important in determining the fertility rate? Considering this theory, suppose a
conditional cash transfer (CCT) program is put into place that targets poor households who
have children. The program grants a significant transfer provided that the recipients meet a
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number of co-responsibilities including: (i) pregnant women receiving prenatal care; (ii)
children under the age of five having regular health checkups and receiving vaccines and
nutritional supplements as needed; and (iii) children from ages 6-14 enrolling in and
attending school at least 85% of the time. Failure to meet these conditions results in being
removed from the program. Given the theory of household fertility decision making,
discuss the likely impacts of this CCT program on fertility. How would go about
empirically assessing if the program has an impact on fertility?
b) Consider a country that had a significant decline in fertility rates over a 20 year period.
Suppose that during this period the government actively promoted contraceptive use
through a national network of public health clinics and that the program was phased in over
a ten years. Considering the theory of household fertility decision making, how might you
empirically test the factors that influenced fertility decline over the period in question,
including the role of the government program? In your answer, be sure to clearly identify
the factors that are likely to matter.
4. Migration
a) Explain and describe the relationship between the following three perspectives on
migration: 1) the neoclassical model; 2) the new economics of migration; and 3) network or
social capital theory of migration. Describe how you would empirically test the relative
importance of these theories in explaining Mexico-US migration. Given these theories,
what policies might be enacted by the US and Mexico to reduce out-migration?
b) The new economics of migration literature argues that in making a decision to migrate
potential migrants do not simply compare expected returns at the point of origin and the
destination. Rather, they factor in their relative position in society. Explain this view of
migration and how you would go about empirically testing whether an individual’s relative
position in society does in fact influence the migration decision?
5. Credit and insurance
a) Consider a microfinance program that employs a group lending approach to deliver credit
to poor households. Suppose the objective of the program is to enhance consumption,
improve the asset position of poor households, and help households cope with risk.
Describe the difficulties in identifying the impact of this microfinance program on these
poor households. Given these difficulties, describe how you would go about determining if
such a program improved borrower welfare?
b) Although markets for credit and insurance are imperfect, rural households in developing
countries employ a variety of ex post mechanisms to cope with risk and smooth
consumption. Describe these mechanisms. Explain how you might test whether these
mechanisms bring about a Pareto-efficient allocation of consumption risk at the community
level (where community can be defined as a village, ethnic group, network, etc.). In
general, what does the empirical evidence suggest about the ability of households within a
community to smooth consumption?
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PART 2. Development Macroeconomics
Answer two of the five questions from this part.
6. Development goals
a) List and briefly describe the eight Millennium Development Goals (MDGs). With respect
to a particular country or a particular region (e.g., South Asia, sub-Saharan Africa, East
Africa, Central America) of your choice, which do you consider to be the three most
important MDGs? Explain your reasons why you consider these to be the most important
MDGs for your chosen country/regions region.
b) With respect to the three MDGs you have selected in part a), describe the historical trends
in progress and prospects of achieving the goals in a timely manner in either the selected
country/region or on a worldwide basis.
c) With respect to the three MDGs and country/region you have selected in part a), describe
the steps/policies you would recommend to accelerate progress, and explain how and why
your recommended steps/policies would accelerate progress on achieving these MDGs.
7. Growth models: The basic neoclassical growth model frames growth of output in terms of
stocks of productive inputs and productivity growth.
a) Explain the model’s basic assumptions and key behavioral questions, write the expression
for output per capita in the steady-state, and explain its intuition. Explain how endogenous
growth models differ from neoclassical models in how they represent the causes of growth.
b) Using growth rate diagrams, contrast the impact of a permanent increase in the savings rate
on growth and income over time in the standard Solow model and in an endogenous growth
model. Relate these savings impacts to predictions of each of these models regarding
convergence among nations.
c) Use the growth rate diagram to distinguish between absolute and conditional convergence.
Briefly summarize the empirical evidence on absolute and conditional convergence across
nations, states and regions. Is it possible for endogenous growth models to be associated
with convergence?
8. Growth, inequality, and poverty: Recent years have seen numerous efforts to understand
‘poverty’ more deeply as well as to analyze the relationships between growth, inequality, and
poverty.
a) What are the methodological issues in measuring poverty? How is the Multidimensional
Poverty Index different from past measures? What are its strengths and weaknesses?
b) Explain classical and recent views on the nature of the relationship between income
inequality and growth. Recently, authors such as Dollar, Forbes, Milanovic, and
Bourgignon have reexamined this relationship. Discuss the major findings. According to
these authors, will income inequality help or hurt economic growth?
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c) What is the role of institutions in promoting economic growth in developing countries?
How does the experience of China conform to the theoretical expectations?
9. Trade and growth. Developing countries are often urged to further open their economies to
greater international trade.
a) What are the factors that determine whether trade liberalization raises or reduces economic
growth? If trade liberalization raises economic growth, would all sectors of the economy
benefit? Why or why not?
b) Outline the empirical evidence regarding openness to trade and growth. Why is it difficult
to determine whether trade causes growth, or vice versa?
c)
(i)
(ii)
Discuss the instruments and estimation methods economists have used to provide
further evidence on the direction of causality between trade and growth.
OR
For a country or region of your choice, describe the steps/policies that have made
it possible for it to benefit from trade liberalization.
10. Monetary policy and exchange rates
a) Describe and contrast the main categories of exchange rate regimes.
b) Explain which regimes provide the greatest and least degree of monetary policy autonomy
and why this is the case.
c) What are the benefits of capital account liberalization? Under what conditions should
developing countries undertake capital account liberalization?
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