Week 1 Name Despoina Katsavra Student number S4668820 OTHER THAN IN TABLE ABOVE, DO NOT WRITE ANYTHING ABOVE THE LINE Development indicators: - Per capita income Percentage of the population below the poverty line Human Development Index Structural characteristics of a typical poor country: - High population growth rate and urban migration Low investment rates Agriculture - main economic sector GNI (Gross National Income) per capita: a measure to assess the avg economic output per person in a country. The total domestic and foreign value added = GDP + income residents receive from abroad for factor services (labour and capital) - payments made to nonresidents who contribute to the domestic economy Nominal GDP : Σ P * Q (total value of goods & services produced in a country) PPP compares prices in j and k: PPP jk = f (Pij, Pik) (function of the prices, compares the relative value of currencies and cost of living in different countries) Real GDP: Qj = GDPj / PPPjk Relative real GDP per capita: Qc / Qu → Exchange rates take into account only tradable goods → PPP take into account price differences in different countries (typically prices of services are lower in developing countries bcs wages are much lower) Purchasing power parity (PPP) Calculation of GNI using a common set of inter- national prices for all goods and services, to provide more accurate comparisons of liv- ing standards. To address this problem, researchers have tried to compare relative GNIs and GDPs by using Purchasing Power Parity (PPP) instead of exchange rates as conversion factors. Ex: India’s 2017 GNI per capita was only about 3.1% of that of the United States using the exchange-rate conversion, but was 11.7% when estimated by the PPP method of conversion → Income gaps between developed and developing nations tend to be less when PPP is used. So exchange rates are not the right way to compare income across countries, what matters is the purchasing power How much time it will take to double per capita income in an economy with a growth rate g: , ln2= t ln (1+g) Countries with higher GDP/capita : - Higher life satisfaction Longer life More education More equal income distribution Income per capita has many limitations as a development index bcs it captures the value of only private goods and services that are bought and sold in the market but ignores: - Externalities / public goods Inequality (distributional concerns) Rights / freedoms → should take other elements as well into account such as health and education Human Development Index (HDI) (takes into acc some of “non-priv good aspects of development and explicitly accounts for non-monetary aspects of well-being) - Income: real per capita gross domestic income Health: life expectancy at birth Education: avg years of schooling and expected years of schooling After defining the relevant min and max values, each dimension index is calculated as a ratio that is given by the % of the distance above the min to the max levels that a country has attained Why use a geometric mean? → ensures that poor performance in any dimension directly affects the overall index. A higher value of education for ex, does not compensate one for one, for a lower value in health index. Summary week: [1] Name: [Despoina Katsavra] Student number: [S4668820] Week 2 Name Despoina Katsavra Student number S4668820 OTHER THAN IN TABLE ABOVE, DO NOT WRITE ANYTHING ABOVE THE LINE Kaldor facts (stylized economic growth facts) - set of empirical observations about the growth patterns of developed economies 1. 2. 3. 4. Stable growth in output / worker (sustained growth over time) Capital / worker has grown Rate of return to capital: stable Capital / output: stable (as economies grow, they tend to invest in capital at a proportional rate to their output growth) 5. Share of labor and capital income in GDP: stable 6. Variation in growth across countries Harrod - Domar model - Explains the relationship between economic growth, savings and investment focuses on the level of investment→ growth in capital in driving economic growth Yt = Ct + St : basic identity -> output is either consumed or saved St = It = sYt : savings are invested in the economy, savings: constant fraction s of income Kt+1 = (1-δ)Kt + It : investments build up capital stock, but depreciates with the rate δ → ΔK = cΔY : linear growth, capital accumulates and its transformed into output at a constant rotate - So more investment = higher growth rate Growth rate of GDP per capita, given population growth n: Δπ¦ π¦ π = π − δ −π Countries with lower savings rates or higher capital-output ratios (c) have lower growth per capita Solow model - Cobb-Douglas production function π = π΄πΎ - α πΏ, 0 < π < 1 Without tech. Change, investment leads to diminishing returns to capita and long-run growth in GDP per capita is 0 - As capital increases, output will increase but at a slower rate cause α < 1 Capital accumulation: Kt = (1-δ)Kt-1 + It Change in capital: Δk = sy - (δ + n) k Similarity to Harrod-Domar: savings determine capital accumulation and drive growth - In periods where savings (sy) > depreciation and dilution (δ+n)k, we see an increase in capital per worker (left of k’) convergence to the steady state: constant capital per person k’ and steady state income per worker y’ most factors will only have a temporary effect on growth rate–changes in these variables only affect the steady state Given equal parameters (s,n..) countries have the same steady state → convergence to the same income level IF there are no tech. Changes Growth Accounting Decomposes the sources of eco growth π = π΄πΎ α π 1−π → Δ lnY = α ΔlnK + (1-α) ΔlnL + ΔlnA Growth rate output per worker: (1+gY)/ (1+gL) - Growth of GDP = growth in capital, labor and tech. Change α: share of capital income in GDP ΔlnA: (total factor productivity (TFP), the productivity with which labor and capital are being used in production ΔlnL depends on population growth rate (n) and labor force participation rate Summary week: [2] Name: [Despoina Katsavra] Student number: [S4668820] Week 3 Name Despoina Katsavra Student number S4668820 OTHER THAN IN TABLE ABOVE, DO NOT WRITE ANYTHING ABOVE THE LINE Growth requires structural transformation-shift of resources (labor,capital) from low-productive (traditional) to high prod (modern) societies - Agriculture-industry, surplus labor: Lewis-Fei-Ranis model (agriculture development determines pace of investment and thus industrial employment) Rural-urban migration: Harris-Todaro model (structural transformation does not have a positive effect on everyone) Economic development → transfer of labor from agriculture → industry - no rich country has a dominant agricultural, rural sector - a country cannot grow rich without agricultural development Key assumption: throughout the period until we reach industrialization, the avg wage earned is constant we are assuming the surplus (difference between wage bill and production function) is taxed away by the government. AB: - agr. production: at its max - surplus labor - Income sharing: avg wage: Y/L(A) = w bar constant even when workers are moved to the ind sector (they take w bar with them to the city) → constant supply of food: constant food prices BC: - disguised Unemployment: surplus of labor- additional workers do not contribute to increased output MP >0 but still MPL < w bar (their earnings are higher than their MP Workers are earning less than their MP & not fully employed Declining surplus: when a worker leaves, agr production falls - Lower surplus→less production→lower supply→prices increase Wages in industry: Wm=Wa*Pa → big impact on the process of industrialization! C: avg product=wage (prod function tangent to the wage line) We also see increasing wage in agriculture to compensate them for the price effect (products more expensive) → leading to higher wages in industry as well (formula) (jump in wage line) First graph: demand curve for ind labor shifts outwards as investment progresses (expansion of capital → higher demand for labor) Second phase: price of food increases→wages of ind workers increase→industrial labor supply curve slopes upwards Family labor: all the workers in the family get the product from the land, and that product is equally divided between the family members Harris-Todaro model: economic theory of rural-urban migration Todaro paradox: a situation where rural-urban migration doesn’t necessarily result in improved standards of living - - Cost: lose rural job (and wages that come with it), Return: probability of an urban job - Version 1: urban unemployment - Version 2: informal job (paying less than the formal or rural job) - AA: demand for agricultural labor set against the agricultural wage rate on the vertical axis - MM: demand for manufacturing labor - Efficient equilibrium E: Wrural (agr)=Wurban (man) - But: Urban labor market friction: leads to a higher wage in manufacturing (line qq) - Crucial assumption: urban formal wages are fixed and higher than agricultural - Urban formal jobs as government showcase - Efficiency wages - Union bargaining power Labor market regulation πΏπ Indifference curve based on the equilibrium condition: ππ = πΏπ’π * ππ - Lus: urban labor pool In this eq.condition, expected wages in industry are equal to wages in agriculture at that point, workers do not have the incentive to migrate. At Lm: demand for agr. workers would show a much lower wage level (Wa**). At this wage, it is very attractive to move to the city for even if you would not get that urban formal job qq curve: Z: wages in agr > than would be in the city, but still lower than the formal urban sector extended model where we have an informal labor market-informal job added to it,depends πΏπ on number of formal jobs available πΏπ’π Wa and Wi are determined in the market ππ = πΏπ πΏπ’π −πΏπ ππ + πΏπ’π ππ πΏπ’π Summary week: [3] Name: [Despoina Katsavra] Student number: [S4668820] Week 4 Name Despoina Katsavra Student number S4668820 OTHER THAN IN TABLE ABOVE, DO NOT WRITE ANYTHING ABOVE THE LINE Complementarity: when one action increases the profitability of another action Due to complementarities: - Marginal private benefits to investment are lower than marginal social benefits Investment traps: you would invest if others would invest but you don’t know if they will, so you don’t ex: multiple equilibria * profitability of one investment depends lno the profitability of another investment - First-movers might suffer losses (delay problem), if I train people to work at my resort, another hotel might open and hire the already trained people without incurring the training costs Special case of delay problem (increasing returns to scale) Leapfrog opportunities: when they have the chance to skip less efficient technologies and adopt more advanced ones Coordination failure: lack of coordination between agents leads to a pareto inferior outcome Policy: - marginal policies will have little effect: big push needed (but might not be permanent) - Temporary policy may have permanent effects Complementarities & Linkages Linkage: industry X uses output of industry X, can lead to positive externalities: - Forward linkage: growth in X can lead to greater scale in Y (sugar manufacturing industry provide input for the pineapple canning industry) Backward linkage: price reductions in Y can stimulate production in X (if the sugar industry depends on another industry for its supply of sugar, there is a backward linkage btn these two industries.if there is a price reduction in sugar, it can stimulate production of pineapple cans Complementarities: the O-ring model Strong complementarities: A piece of equipment on a space shuttle, which led to the explosion of the shuttle. Explains how a weak coordination link can lead to catastrophic events. 2 2 It always pays to match 2 high type workers together or 2 low types ( π» + πΏ > 2π»πΏ ) Lack of high-wage employment opportunities can lead to lower investment in human capital → traps countries in low-development Policy options: Big push: Large simultaneous investments in various industries β Investment is often not sustained Unbalanced growth: gov start development through unbalanced growth - invest in key industries with β Large number of linkages β Strong linkages β Intrinsic profitability β Less intensive than “Big Push” but still requires very effective government Guided development: create conditions for entrepreneurs, focus on bottlenecks for growth Need to deal with: - externalities that hold back investments - Constraints on gov info β Government needs to encourage the exploration of new products (overcome r social> r private) Good equilibrium: better than bad bcs investment levels are way higher Suppose you are in bad equilibria - you need a big push - If you don’t pass the unstable eq pint you will always fall back to the bad equilibria Need a big push to get you pass the unstable point & reach the good equilibria Summary week: [4] Name: [Despoina Katsavra] Student number: [S4668820] Week 5 Name Despoina Katsavra Student number S4668820 OTHER THAN IN TABLE ABOVE, DO NOT WRITE ANYTHING ABOVE THE LINE Headcount index (H/N): the proportion of a country’s population living below the poverty line Total Poverty Gap (TPG): measures the total amount of income necessary to bring everyone up to our defined minimum income standards PV: poverty line TPG (A) > TPG (B) TPG = Σ (Yp - Yi) Adding up the amts by which each poor person’s income Yi, falls below the absolute poverty line Yp Average poverty gap APG = TPG/N Multidimensional Poverty Index: incorporates three dimensions - Health ( nutrition and child mortality) Education Wealth - standards of living (electricity, safe drinking water..) Limitations of MPI: - Data are from the household rather than the individual level It does not fully distinguish btn past & present conditions Does not distinguish differences btn households Proxies are imperfect Poverty measures Headcount ratio Hm: the percentage of ppl living in multidimensional poverty HC: number of individuals i with income Yi < P (poverty line) HCR (headcount ratio/index) : HC/n the percentage of ppl living in multidimensional poverty (n:population) - fails to adequately account for the intensity of poverty PGR (Poverty gap ratio) : Σ (Yp - Yi) / nm = TPG / nm , the avg income needed to get all the poor to the poverty line (m=avg income) IGR (Income gap ratio) : Σ (Yp - Yi) / pHC , same as PGR but we divide it by the total income required to bring all the poor people to the poverty line → drawback of these measures: they are indifferent to the relative deprivation of the poor World bank: poor by the standards of the poorest countries: $1.90/day Consequences of poverty: - Poverty trap: higher poverty → lower growth Low income → low savings → low investment → low productivity → low income - Poverty might lead to unequal sharing: discrimination among women and older ppl Credit constraints on the poor: - Poor have fewer assets → no collateral → no credit Need collateral as a safeguard against moral hazard Microfinance: Microfinance is a financial service provision model that aims to provide financial services, such as credit, savings, insurance, and other basic financial products, to low-income individuals or communities who have traditionally been excluded from the formal banking sector. - Reduces moral hazard and risk of strategic default - Small amts - Social control (group loans, lending to women) Poor have a worse nutrition → less productive Capacity curve: increases approx. w income: (x axis really should be “nutrition” (assumption that all income is spent on nutrition) π* ππΆ(π *) = 2 * ππΆ( 2 ) Can’t people borrow to get out of the vicious cycle: - Hard for poor people to borrow (credit constraints) Relationship btn poverty and resource allocation within the household - Extreme poverty → unequal treatment within the household “lifeboat problem”: certain minima needed for people to live a productive life Equal treatment may not allow everyone to have those minima At incomes below the critical household Y* unequal consumption allocations create greater household work capacity than equal allocations. Summary week: [5] Name: [Despoina Katsavra] Student number: [S4668820] Week 6 Name Despoina Katsavra Student number S4668820 OTHER THAN IN TABLE ABOVE, DO NOT WRITE ANYTHING ABOVE THE LINE Dalton transfer: transferring money from a richer person to a poorer person should decrease measured inequality Visualize income distribution: Lorenz curve ex:20% of the population earns abt 7% of the total income (its income is below avg) Lorenz curve is below the 45 degree line bcs you are always starting w the lowest earning group of the population 4 different income groups Difference btn 3rd and 4rth: less than 20% of the population and 30% of the income Lorenz curve in 2 points in time L1: higher than L2 in all points In order to move from L2 to L1 is through progressive Dalton transfer Lorenz curve & Gini coefficient: Area btn Lorenz curve and the 45 degree line Kuznets ratio: income share of the top relative to the bottom ππππππ π‘ππ ππππππ πππ‘π‘ππ Does the Kuznet ratio satisfy the Dalton transfer principle? → no, when there is a transfer of money from the richest to the poorest, the ratio does not change If a relatively poor person loses income to a relatively rich person, the mean absolute deviation must rise - true Increase in savings → increase in investments → increase in growth Human capital accumulation: More low income ppl → lower levels of schooling → lower levels of human capital → less eco growth - Does inequality influence growth? Higher inequality seems to reduce growth - Savings 7.2.4 - Redistribution 7.2.5 - Human capital accumulation 7.2.9 Marginal savings rates Compare a very unequal society and a very equal society: - Unequal: ½ population at A and ½ at C Equal: All at B → savings are higher in the equal society Piketty: emphasis on the share of income earned or wealth owned by the top-1 percent of the population rather than concepts like the Gini coefficient. - + offering a clearer picture of inequality + draws attention to the significant disparities in income + Better policy limit comparative analysis across different countries or time periods - extreme wealth concentrations. Summary week: [6] Name: [Despoina Katsavra] Student number: [S4668820]
