development economics exam 1

what constitutes a developing economy?

inequality, lack of opportunity, lack of resources, higher birth rate, lower GDP per capita, etc.

what is the “extreme poverty line”

$2.15 per day

different development theories over time

Marshall plan, post WWII

50s and 60s — encouraged saving and investment in the industry, saw import substitution and moved away from agriculture — this helped to reach growth targets, but one should also account for population increase

70s — shift from growth to addressing poverty and inequality, the government intervened

80s — more market role (debt crisis); removed barriers and promoted free markets

90s-present — reversion to increased government intervention to regulate markets, seeing protections, experiments and incremental changes through projects and programs

GDP

defined as the value of all final goods and services produced within a country within a given period of time

GDP per capita — the average income in a population, what everyone would have if income were to be distributed evenly

what isn’t accounted for in GDP?

subsistence crops (depends), unpaid family labor, black market activities, environmental implications — it’s harder to get a ready on GDP in developing countries due to more informalities and difficulty discerning the market price

why adjust for inflation?

it’s important when analyzing values over time or for volatile currencies

exchange rate

exchanging one currency for another — doesn’t account for the cost of living in different countries

purchasing power parity

taking the cost of living into account, accounts for different labor costs, rent, and access to capital in different countries

why care about poverty?

morally no one should be poor and it reduces people’s abilities to thrive; economically poverty reveals inefficiencies in the economy and may have an economic social cost — for example, if everyone had access to a full education they would best be able to participate in the economy and be productive

what is poverty?

wherein someone’s economic status precludes them of the ability to live a full life where all needs are met/to have a decent standard of living

alternate construct: the poverty line exists where people begin shifting out of staples

U.S. v. Peru’s poverty lines

The United States has one poverty line (save for Alaska and Hawaii) b/c people are mobile; Peru has multiple poverty lines accounting for regions, urbanization, etc.

human development index

incorporates the capabilities approach to create an index that measures quality of life and not just income

considers ability to lead a long and healthy life, access to knowledge, and a decent standard of living

measured from 0-1 to make standardization and comparison easier

capabilities approach

functioning, capabilities, and agency

life expectancy at birth

accounts for the life expectancy after reaching adulthood and child mortality

education index

accounts for mean education years for adults (changes over longer periods of time) as well as expected years of schooling for children (to reward recent efforts in education)

log average income (GNI per capita)

is logged to display how extra money bears less significance for wealthier people, uses PPP to adjust for the cost of living

why is income only imperfectly correlated with HDI?

just because a country is wealthy does not mean that it invest in education, that it does not have inequality, or that it is not susceptible to illness

millenium development goals

goals set by UN members to be reached in 2015 — aligned with notions of human development and capabilities

progress was benchmarked from 1990

was it successful? halving poverty achieved but attributed to some large countries like China, halving hunger also saw substantial progress but again was specific to specific regions and countries

sustainable development goals

set post-millenium development goals

aiming for greater progress, like elimination and sustainability

income measurement

measured by per capita income, which doesn’t account for inequality and thus implicitly assumes that the distribution of income doesn’t matter

poverty measurement

measured by the headcount index, FGT2, the poverty gap, and income gap — inequality matters but only below the poverty line

inequality measurement

inequality is measured by the Gini index and the income or wealth of the top 1, 10% — distribution of income matters for the wealthy and the poor

how are poverty and inequality related?

poverty can exist without inequality existing and inequality can exist without poverty existing, but generally greater poverty means greater inequality

The Lorenz curve

A graphical representation of inequality

a 45 degree line indicates perfect equality, perfect inequality depicts a scenario where only one individual controls all of the wealth in an economy

finding a good index in equality, an index should fulfill…

independence of income scale — a proportional change in all incomes (like changing the currency) shouldn’t impact the measurement of inequality

independence of population scale — a change in the size of the population shouldn’t impact the measurement of inequality

anonymity — people’s places changing in the income scale shouldn’t impact inequality (identity shouldn’t matter)

Pigou-Dalton transfer principle — when income is transferred from a low-income person to a high-income person the measurement of inequality should increase

decomposability — we should be able to use this measurement to also look at inequality in terms of different sources of income, not just total income

prices with regards to purchasing power parity

commodity prices (tradable goods) may be comparable prices across countries, not so for services or non-tradable goods (like a Big Mac)

measuring household income using consumption

more accurate in developing countries, where income may vary seasonally — especially for poorer or subsistence households

U.S. consideration of poverty

if food accounts for more than 1/3 of your income, you’re poor