2 - Comparative Economic Development

Question 1

3 basic indicators of development

Answer 1

• Gross national income (GNI)
• Gross domestic product (GDP)
• Purchasing power parity (PPP) method instead of exchange rates

Question 2

Define GNI

Answer 2

Total domestic and foreign output claimed by residents of a country + incomes earned by foreign residents - income earned in domestic economy by non-residents

Question 3

Define GDP

Answer 3

Total output of goods and services produced by the country’s economy within the country’s territory by residents and non-residents; regardless of its domestic or foreign claim

Question 4

Define purchasing power parity (PPP)

Answer 4

Calculations of GNI using common set of international prices for all goods and services, to provide more accurate comparisons of living standards

Question 5

What’s the obvious way to compare income

Answer 5

Exchange rates

Question 6

2 problems using exchange rates

Answer 6

1) They can change significantly over short periods of time, implying large swings in ‘standards of living’

2) Exchange rates more relevant to goods that are exchanged, tradables, rather than non-tradables (services). Non-tradables tend to be cheaper in developing countries

• As a result, calculations of GDP based on exchange rates, tend to over-estimate cost of living in poor countries

Question 7

What does GNI not measure between developing and developed countries

Answer 7

It doesn’t measure domestic purchasing power of different currencies

Question 8

How is the problem addressed of GNI not measuring PPP of different currencies

Answer 8

By comparing GNI and GDP using PPP

Question 9

How’s PPP calculated

Answer 9

Using common set of international prices for all goods

• How many units of a foreign currency is required to purchase the quantity of goods and services in the local developing country marker as $1 would buy in the US
• Adjustments are made for differing relative prices across countries so that living standards are measured more accurately

Question 10

Why are non-tradables (services) prices much lower in developing countries

Answer 10

Lower wages

Question 11

If domestic prices are low what will the PPP be

Answer 11

PPP of GNI per capita will be higher than estimates using foreign exchange rates, as cost of living will be cheaper (purchasing power is higher)

Question 12

Holistic measures of living levels

Answer 12

• Income
• Health
• Education

Question 13

What type of means is used to calculate New HDI and Traditional HDI

Answer 13

New HDI = Geometric mean (add the 3 components indexes and then find the cubic root)

Traditional HDI = Arithmetic mean (add the 3 components and divide by 3)

Question 14

What are the 3 components in the equation of new HDI

Answer 14

(Ilife x Ieducation x Iincome) 1/3

Question 15

Differences between traditional and new HDI

Answer 15

• Traditional HDI assumes one component traded off the other as perfect substitutes
• This reformulation allows for imperfect substitutability
• New HDI addresses how ‘well-rounded’ a country’s performance is across the 3 dimensions
• GNI per capita replaces GDP per capita
• Lower goalpost for income been reduced due to new evidence on lower possible income levels

Question 16

Comparing characteristics among developing countries

Answer 16

• Lower levels of living and productivity
• Lower levels of human capital
• Higher levels of inequality and poverty
• Higher population growth rates
• Greater Social fractionalisation

Question 17

Are living standards converging across countries?

Average living standards ratio between developing and developed countries before industrial era to currently

Answer 17

3:1 before industrial era
100:1 currently

Question 18

When did great divergence occur

Answer 18

• Following the industrial revolution as technological advances, discovery of shipping routes
• Growth of real output per person since 1750 gradually increased

Question 19

2 reasons why living standards converging across countries is likely

Answer 19

1) Diffusion of ideas across countries (technological transfer), so can avoid trial and error, grow fast
2) Diminishing returns to capital (though as economies develop, they often find ways to compensate)

Question 20

If poorer countries are growing faster what will the plot of data look like

Answer 20

Will be downward sloping, indicating convergence

Question 21

If poorer countries are growing slower what will the plot of data look like

Answer 21

Upward sloping, indicating divergence

Question 22

Even when average income in developing country is faster what can still happen

Answer 22

The absolute difference can still continue to widen between incomes in developed and developing countries, before they begin to shrink (lags)

Question 23

What’s stronger absolute country convergence or country income convergence

Answer 23

Absolute country convergence

Question 24

Convergence and divergence in terms of inequality

Answer 24

A fall in inequality = Convergence
A rise in inequality = Divergence

Question 25

What can population-weighted countries do in terms of convergence

Answer 25

Look at changes in convergence more specifically between rural and urban areas (China for example)

Question 26

Risks and opportunities of future convergence

Answer 26

Risks = New technological divides, climate change, armed conflicts
Opportunities = World May be on a sustainable path towards a great re-convergence

Question 27

Long run causes of comparative development (geography)

Answer 27

• Geography important in pre-modern era
• Colonists viewed opportunities they could exploit in colonies
• Geography affected comparative advantages; resources and people
• Geography helps explain “motivation” for institutions; extractive when comparative advantage was in activities with increasing returns (sugar cane, mining)
• Bad institutions created high inequality which caused slower growth and slow improvement of human capital