Spring 2014

Global 130 Global Economy and Development

Midterm 1: Review Sheet

This sheet lists study questions designed to help you ensure you understand the most
important material covered for the exam. It is not intended to substitute for a thorough
review of your lecture notes. However, if you can answer these questions clearly, you
will know just about everything I expect you to learn from the readings.

Introductions
1. What do you learn from the per capita GDP figures presented in the first lecture
regarding countries relative growth rates, and standards of living? What were the
growth experiences of China, India, Thailand, the US, and the Central African
Republic between 1980 and 2009?
2. What did you learn about the relationship between infant mortality and per capita
GDP by comparing the experiences of these five countries?
3. What is a PPP correction?
4. What is the difference between a real and nominal variable?

What is Development?
5. What are some of the challenges facing most developing economies?
6. What is structural transformation?
7. Why might limited access to public services and the absence of social safety nets
and other institutional protections pose an impediment to investment and growth?
8. How have economists definitions of what constitutes development changed?
Why did they change?
9. What is Sens capabilities approach to understanding development? How does
it differ from the utilitarian thinking? What are functionings and
commodities? How do the utilitarian and capabilities approach differ in their
treatment of the role of income?

Wealthier is Healthier
10. What do we learn from a simple scatterplot of per capita GDP and infant
mortality?
11. Similarly, what is the crude relationship (correlation) between per capita GDP on
one hand, and child mortality (and how is child mortality different from infant
mortality?), and life expectancy, on the other?
12. The two main reasons why such a simple statistical measure of the relationship
between per capita GDP and health might lead us to draw incorrect conclusions
are: reverse causality, and omitted variables bias. With respect to each of these
potential errors of inference:
a. What are they, and why might they arise?
b. In the context of income and health, explain why extrapolating from
simple correlations to the conclusion that changes in income cause
changes in health outcomes might be due to this error of inference.
c. What do Pritchett and Summers do to correct for each potential error?
d. What happens to their estimate of the causal impact of GDP on health
when they make each correction?
13. Why might we expect correlations between income growth and health
improvements over a 5 year period to be smaller than those same correlations
over a 10, 20 or 30 year period? What do the data suggest in this regard?
14. Roughly what percentage of the reduction in Bangladeshs infant mortality rate
between 1975 and 2005 can be attributed to its economic growth over this period?


Markets, Efficiency and Equity
15. What is economic efficiency?
16. What are marginal social benefit and marginal social cost?
17. Why is the economically efficient amount of any activity the amount at which
MSB=MSC? Why wouldnt it be efficient to have more or less than that amount
of the activity?
18. What is the relationship between the MSC, MPC and supply curves? What is
MEC, and how does it figure in this logic? Give examples.
19. Under what conditions will a competitive market (intersection of supply &
demand) produce the efficient quantity of an activity?
20. How are MSB and MPB measured? Under what conditions might efficient
outcomes be socially undesirable? Under what conditions are efficient outcomes
likely to be desirable?
21. What causes supply and demand curves to shift? What do these forces do to the
equilibrium quantity and price of goods? Make sure you can predict the effects of
changing market conditions on price and quantity.
22. Explain how at least three different forces caused food prices to spike in the
spring of 2008, or are doing so now. Explain with reference to supply and
demand graphs.

Poverty and Famines Chapter 7 (Amartya Sen)
23. What is food availability decline? Did total food-availability decline in
Ethiopia at the time of the Ethiopian famine?
24. Who starved in the famine and why? Explain using supply and demand analysis.
What does this tell you about the ethical pitfalls of using economic efficiency as a
criterion for allocating goods, minimal access to which might be deemed a
human/social right?


Intervention in the market
25. What approaches can governments attempting to keep food and fuel affordable to
the poor adopt? What factors have tended to influence which approach
governments choose?
26. What are price floors and price ceilings? What effect do they have on quantity
supplied and demanded? Why might they lead to shortages or surpluses,
economic rent, and black markets? What are the four key problems with price
ceilings?
27. What are the major problems that tend to arise when governments introduce
systems to market subsidized food/fuel in parallel with the regular market?
28. What lessons about subsidy programs and price ceilings can be learned from
looking at Indias kerosene subsidy/price control program?
29. Given the enormous problems posed by interventions in otherwise efficient
markets, why do so many governments make them? Is it simply the worst sort of
populism? Or do these interventions carry some benefits? If so, what are they?
30. Why did Nigeria try to eliminate its fuel subsidies? What was the result of this
effort?
31. What is the significance of Chattisgarhs experience with reforming its Public
Distribution System? What reforms did it undertake, and what did they
accomplish?

Trade Models, Trade Negotiations
32. What is opportunity cost? How does the concept help to explain why industrial
workers in the developing world are paid less than those in the developed world?
33. What is absolute advantage? What is comparative advantage? According to most
economists, which is the more useful concept for thinking about which countries
will export what?
34. Make sure that you can work out, using a basic 2-good, 2-country, 1-input,
Ricardean framework, which country has a comparative advantage in the
production of which good. Make sure you can demonstrate why they could gain
from trading
35. Make sure that you can work out, using a basic 2-good, 2-country, 2-factor,
Heckscher-Ohlin framework, which country has a comparative advantage in the
production of which good; how demand for each factor of production would shift
on opening up to trade; and what this would do the incomes of people who own
the different factors of production in each country.
36. What is the compensation principle? How does it relate to consumer and
producer surplus?
37. On a graph of supply and demand, what happens to the demand curve for a
potential export when we move from autarky to free trade? What happens to the
supply curve for a potential import when we move from autarky to free trade?
What happens to consumer surplus, producer surplus and social surplus in each
case? What does a comparison of the autarky price to the world price tell you
about whether a good is a potential export or a potential import?
38. With the answers to the above question in hand, why do economists not like
restrictions on imports and exports?
39. The logic of comparative advantage and the gains from trade does not impress all
analysts in all cases. What are some of the reasons that have been offered to
argue that countries will sometimes benefit from restricting trade?
40. The logic of comparative advantage suggests that countries would be better off
simply removing all their trade barriers. So, assuming we want to move towards a
world of freer trade, why do we need a WTO?
41. What does the Atlas of Economic Complexity tell us about product space and
movements through product space? Why might movements through product
space be path dependent? Why might countries that are producing an unusually
complex mix of products grow faster?




List of Readings for Midterm 1:

1 Todaro & Smith, Chapter 1, pp. 15-32
2 Todaro & Smith, Chapter 2, pp.37-71
3 Easterly, Chapter 1
4 Pritchett & Summers, 1996, Wealthier is Healthier.
5 Krugman & Wells, Ch. 2 appendix.
6 Krugman & Wells, Chapter 3
7 Krugman & Wells, Chapter 19, pp. 466-9.
8 Sen, 1981, Poverty and Famines, Ch7.
9 Krugman & Wells, Chapter 4
10 Rehman et al., 2005, Availability of Kerosene to rural households: a case study from India
11 Three articles posted on Nigeria
12 Chhatisgarh shows the way
13 Two articles on conditions in Bangladeshi factories.
14 The Economist The Problem with Made in China
15 Krugman & Wells Ch. 17
16 Atlas of Economic Complexity
17 Booming Mongolia
18 Bowring
19 Economist The WTO Delivers
20 Spence, 2011, Globalization and Unemployment