ch4 flashcards

Question 1

What is complementarity in economics?

Answer 1

When an action by one agent (firm, worker, government) increases the incentives for others to follow.

Question 2

Example of complementarity?

Answer 2

More users on WhatsApp make it more useful for others.

Question 3

What is coordination failure?

Answer 3

When economic agents fail to work together, leading to inefficiencies and low development.

Question 4

Example of coordination failure?

Answer 4

Factories won’t produce cars if there are no roads, and governments won’t build roads without cars.

Question 5

What are multiple equilibria in development?

Answer 5

Some countries are stuck in low-development traps, while others reach high-development pathways.

Question 6

Big Push Model (Paul Rosenstein-Rodan)?

Answer 6

A massive coordinated investment across multiple industries is needed to escape underdevelopment.

Question 7

Why does the Big Push Model require government intervention?

Answer 7

Firms won’t invest unless there’s enough demand, infrastructure, and workforce development.

Question 8

Key benefits of the Big Push Model?

Answer 8

Intertemporal effects, urbanization effects, infrastructure effects, training effects.

Question 9

Example of the Big Push in action?

Answer 9

Industrialization policies in South Korea and Taiwan.

Question 10

What is the O-Ring Theory (Michael Kremer)?

Answer 10

Small failures in production ruin the entire output, just like the Challenger disaster.

Question 11

Example of O-Ring Theory?

Answer 11

A car factory where one faulty tire ruins the entire car.

Question 12

Implications of the O-Ring Theory?

Answer 12

Developing countries need better education and skill-building to avoid low-productivity traps.

Question 13

Self-Discovery Model (Hausmann & Rodrik)?

Answer 13

Countries must experiment to find their comparative advantage in production.

Question 14

Why is Self-Discovery difficult?

Answer 14

Firms are afraid to invest in new industries due to uncertainty.

Question 15

Example of Self-Discovery in action?

Answer 15

Bangladesh excelled in garment exports but not in electronics.

Question 16

Growth Diagnostics Framework (HRV Model)?

Answer 16

Helps policymakers identify the biggest constraint to economic growth.

Question 17

Key steps in Growth Diagnostics?

Answer 17

1. Identify low returns or high cost of finance. 2. Find root causes (infrastructure, institutions, etc.).

Question 18

Example of Growth Diagnostics?

Answer 18

Bangladesh’s main constraint was electricity shortages, not financial capital.

Question 19

What are backward and forward linkages?

Answer 19

Backward: Firms buy from local suppliers. Forward: Firms supply inputs to other industries.

Question 20

Why are linkages important?

Answer 20

Help create industrial clusters that drive economic growth.

Question 21

What is a low-level equilibrium trap?

Answer 21

When an economy gets stuck at a low productivity level due to coordination failure.

Question 22

What is the difference between extractive and inclusive institutions?

Answer 22

Extractive institutions concentrate power; inclusive ones encourage participation & innovation.

Question 23

How do institutions affect development?

Answer 23

Strong institutions provide stability, investment security, and economic incentives.

Question 24

What is an example of an extractive institution?

Answer 24

Colonial policies that restricted economic growth in African nations.

Question 25

What is the role of human capital in growth?

Answer 25

Higher skills = higher wages, more productivity, and better job opportunities.

Question 26

Why do wages rise in developed countries?

Answer 26

Higher levels of education, skill, and technology adoption.

Question 27

Why do developing countries struggle with O-Ring effects?

Answer 27

Weak institutions and poor education trap them in low-productivity jobs.

Question 28

Example of a country overcoming coordination failure?

Answer 28

South Korea’s industrial policy focused on export-driven growth.

Question 29

What is pecuniary externality?

Answer 29

An action in one industry affects the cost or demand of another industry.

Question 30

What does a country need to escape the middle-income trap?

Answer 30

Innovation, industrial upgrading, and better institutions.

Question 31

What are the main causes of underdevelopment?

Answer 31

Coordination failures, poor institutions, lack of investment, and market inefficiencies.

Question 32

What role does infrastructure play in development?

Answer 32

Electricity, roads, and water systems reduce business costs and increase productivity.

Question 33

Why does industrialization need a “critical mass”?

Answer 33

If too few firms industrialize, costs stay high, and industries fail.

Question 34

Example of a failed industrial policy?

Answer 34

Some African countries subsidized inefficient industries, leading to high costs.

Question 35

Why is education a key driver of growth?

Answer 35

More skills = better jobs = higher wages = economic growth.

Question 36

What is the biggest constraint in many developing nations?

Answer 36

Weak institutions and poor infrastructure.

Question 37

How does economic policy affect development?

Answer 37

Targeted policies can remove bottlenecks and boost productivity.