Development Economics - CH1

Give some reasons why GDP may fail to measure value added in a country

• GDP only focuses on goods/services that are transacted in markets.

• Problem because many valuables contributions to society never enter the market, especially in poor countries

• For example many farmers consume the food they produce.

• This is why GDP of poorer countries tends to be underestimated. With the help of survey estimates such shortages of GDP can be overcome.

Briefly explain the difference between exchange rate conversion and PPP conversion of GDP

Exchange rate conversion : Use market exchange rate typically between USD and local currency to compute both GDPs in USD.

Purchasing Power Parity conversion : helps equalize the purchasing power of different currencies by eliminating the difference in price levels acorss countries.

Explain the so-called Easterlin paradox

People living in rich countries report to be happier than people living in poor countries. But as a country gets richer average happiness does not rise.

might be due to importance of relative income

Explain briefly whether the Washington Consensus was consitently grounded in economic theory or should more be considered as a policy paradigm

WC shorthand term for a number of economic reform policies

The goal was to nurture development and they mostly focused on :

·   Macroeconomic stability (low budget deficits, broad tax base)

·   Market liberalization (more FDI, privatization of public firms,…)

In order to enforce their goals, the World Bank and US starte to tie loans to market reforms. It was important to implement the reforms as quick as possible until market liberalization couldn’t be stopped anymore.

While WC was party grounded in neoclassical economic theory, it was mainly adapted as a one-size-fits-all development plan across countries in very different stages of development. Therefore it functioned mainly as a politically driven policy framework.

Outline six common elements of sustained growth experiences and highlight which channel was under-emphasized in the Washingtion Consensus strategy

• macro-economic stability

• high levels of investment and savings

• good leadership and governance

• success in exploiting international markets for technology/knowledge

• diversified outward orientation

• allow the market to play a role in resource allocation