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:
Δ𝑦
𝑦
𝑠
= 𝑐 − δ −𝑛
Countries with lower savings rates or higher capital-output ratios (c) have lower growth per
capita
Solow model
-
Cobb-Douglas production function
𝑌 = 𝐴𝐾
-
α
𝐿, 0 < 𝑎 < 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
𝑌 = 𝐴𝐾
α
𝑃
1−𝑎
→ 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
𝐿𝑚
Indifference curve based on the equilibrium condition: 𝑊𝑎 = 𝐿𝑢𝑠 * 𝑊𝑚
-
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
𝐿𝑚
on number of formal jobs available 𝐿𝑢𝑠
Wa and Wi are determined in the market 𝑊𝑎 =
𝐿𝑚
𝐿𝑢𝑠−𝐿𝑚
𝑊𝑚 + 𝐿𝑢𝑠 𝑊𝑖
𝐿𝑢𝑠
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 ( 𝐻 + 𝐿
> 2𝐻𝐿 )
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
➔ Investment is often not sustained
Unbalanced growth: gov start development through unbalanced growth - invest in key
industries with
● Large number of linkages
● Strong linkages
● Intrinsic profitability
➔ 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
➔ 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)
𝑌*
𝑊𝐶(𝑌 *) = 2 * 𝑊𝐶( 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
𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑜𝑝
𝑖𝑛𝑐𝑜𝑚𝑒 𝑏𝑜𝑡𝑡𝑜𝑚
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]