ECON 465 Final: ECON 465 Study Guide
I. 2 - Development Gap
A. Key Question - why are some countries rich and others poor
B. Static vs. Dynamic View
1. Dynamic: provides development differences over time
a. Population Growth leads to GDP Growth due to higher output
b. But it puts a higher strain on the resources of the country as
well
2. Static View: provides development differences among countries
during a specific time period
C. Measures of Development Gap
1. GDP per Capita (PPP) gap
. Shows the very real differences taking into account Purchasing
Power Parity (the differences between developed countries and
developing countries is usually less for GDP per Capita with PPP
than when just looking at GDP per capita with market exchange
rates)
a.
2. Poverty Gap
. Poverty Line - Threshold for determining poverty
1. Example : $1 a day line (this is an absolute example)
2. Absolute
a. Basic Needs
b. Necessity
c. Minimum Levels of Food, clothing and Shelter
d. Examples: How much income is needed to buy
2000 calories of food
3. Relative
. Comparing people to each other
a. This depends on the individual’s country
a. Headcount ratio
1. H = QN, Q = Number of people below Poverty line, N =
total population
. Creates a proportion
2. Poverty Line should be adjusted for inflation Year on Year
3. Drawbacks - Treats all degrees of poverty the same,
someone 1% below the line carries the same weight as
someone 50% below the poverty line
b. Poverty Gap measurement
1. Takes into account the degree of poverty (distance from
the poverty line)
2. PG =Q(z-yq)z, Q = Number of people below the poverty line, z =
Poverty line, yq = Average income of those below z
3. Average Poverty Gap (Poverty Gap Index) =
PGN=(QN)(z-yq)z=(H(z-yq))z
. Multiplying the APG by the total number of people
and the poverty line yields the total income
necessary to eliminate poverty
3. Health Gap
a. Life Expectancy
1. How long a newborn would live if a country remained the
same
2. Reflects the Health conditions and quality of healthcare
b. Infant Mortality
1. The probability that a child will die before it reaches 1
2. Captured “out of 1000”
4. Education Gap
. Higher education = higher productivity = Higher output
a. Education is very expensive for poorer countries
b. Gross Secondary School
1. # of students actually in school# of students Expected in
School
2. Can be greater than 100% due to unexpected enrollment
3. Equates to net enrollment rate adjusted for total enrollment
5. Urbanization Gap
. Measures the amount of people in Urban vs Rural areas
a. Based on the Theory that development drives urbanization but
doesn’t address the fact that the threshold for “urban” varies
across countries
b. Urbanization does not mean greater living conditions
1. Ex: Slums in Brazil
2. City Unemployment can be better than Rural
c. Cities are greener than having everything spread out
C. Growth over time
D. Catch up and Decline
0. Policies for catch up
. Low Tax, Low interest rates
a. First - Favor investment, then need to switch to an innovation
economy
III. 3 - Poverty and Inequality
. Measuring Inequality
0. Quantile Measures
. Sort Population by income
a. Make 5 bins of equal size
b. Find ratio of richest to poorest
c. Drawback - ignores the amount of people in the “middle”
1. Kuznets Ratio
. The quantile ratio of the average income in the highest quantile
over the average income in the lowest quantile
2. Lorenz Curve
. Plots the cumulative share of income held by different quantiles of
the population
3. The Gini Coefficient (satisfies four desirable qualities: anonymity,
population independence, scale independence, transfer) = 2A
A. Inequality and Development
B. Kuznets Curve
C. Economic determinants of income inequality
0. Education
1. Land Ownership
D. Inequality over time
E. Between vs Within Country Inequality
IV. 4 population
. Population over time
A. Malthus Model
B. Demographic transition 0
0. High death and birth rates
1. Low death rates, birth rates remain high
2. Low death rates, low birth rates
. This creates a very low growth rate
C. Determinants of population growth
0. Total fertility rate
1. Birth and death rates
2. Population growth
3. Migration
D. Age Distribution and inertia
0. Population pyramids
E. Economics of Fertility Choices
0. Substitution Effect
1. Income Effect
. Children are relatively cheaper so you can have more children and
goods
a. Since children have become cheaper, your income has effectively
“risen”
2. Normal vs. Inferior Goods
. Normal goods = you consume more when your income rises, has
a positive correlation
a. Inferior Goods = consume less when income rises, has a negative
correlation
1. Children are inferior goods
F. Other determinant of fertility choices
0. Insurance effect
. Children can be like “safety nets” (take care of you when ur old)
a. Poor people have a lot of children as “insurance”
1. Opportunity costs
. Raising children takes time
a. If you could be making a lot of money because you are highly
skilled, you may opt not to have children because oppor
b. The higher your income, the more you are giving up by staying
home and raising children instead of going to work
2. Quantity-quality trade off
. Should you have a lot of children and pay less attention to each in
the hope that one will be very productive and “payoff”
1. Lots of kids, fewer resources (i.e. $$) per child
a. Or should you have a few children and focus your energy on them
in order to increase the chance that they become very productive
1. Fewer kids, more resources (i.e. $$) per child
3. Social Norms
4. Institutions
. The better the childcare, the more likely you are to have children
G. Old-age dependency ratio
Document Summary
2 - development gap: key question - why are some countries rich and others poor, static vs. Shows the very real differences taking into account purchasing. Power parity (the differences between developed countries and developing countries is usually less for gdp per capita with ppp than when just looking at gdp per capita with market exchange rates: poverty gap. Poverty line - threshold for determining poverty: example : a day line (this is an absolute example, absolute, basic needs, necessity, minimum levels of food, clothing and shelter, examples: how much income is needed to buy. Comparing people to each other: this depends on the individual"s country, headcount ratio, h = qn, q = number of people below poverty line, n = total population. Poverty line, yq = average income of those below z: average poverty gap (poverty gap index) =
