1. Poverty Measure: A nice feature of poverty measures is that they be decomposable.

That means that the poverty measure for group is the weighted average of the poverty measures for the subgroups. For instance if you divided the country into urban and rural groups then

Watts index of poverty:

a) Poverty measures are usually based off of household surveys, which might have restricted access. Therefore, as a researcher, it is nice to have a measure that can sometimes be computed without access to the underlying data. Letʼs see if the Watts index is decomposable. Do this by showing whether, if you knew Wtotal , Wurban , Ntotal , Nurban (and Ntotal = Nurban + Nrural ), that you could computer Wrural . You must clearly show every single step in detail.

b) Suppose that the minister of the Republic of Jamtland is considering two ways of lower
its Watts index. It could either (a) lower the Wrural from 0.5 to 0.3 or it could (b) lower Wurban from 0.3 to 0.2. Itʼs population is 80% urban and 20% rural. Assume that the policies are equally attractive otherwise. Which method would lower the Watts index more and show/explain why in detail?

2. Todaro-Smith: The basic Todaro-Smith model is that there is a stable capitaloutput ratio c = Kt/Yt and that the change in capital is a constant fraction of output. Letʼs
add depreciation to the model making the equation describing the change in capital to be Kt − Kt−1 = ∆Kt = sYt − δKt . (Note that the time subscripts for this model are a bit different than with others.) a) Solve for the growth rate in output as detail.

∆Yt/Yt. You must clearly show every single step in

b) Suppose that currently, the government knows that ∆Yt / Yt = 0.025 (2.5%) and s = 0.10. They initially (incorrectly) assume that there is no depreciation (δ = 0). What will they compute for c, and if they want to increase the growth rate to 0.05, what would they have to raise s to? You must clearly show every single step in detail. c) Then they measure depreciation and find that δ = 0.025. Now what will they compute for c, and if they want to increase the growth rate to .05, what would they have to raise s to? You must clearly show every single step in detail.

3. Todaro Migration model: We will try to combine characteristics from the Lewis model (low marginal productivity of agricultural labor) with the graphical Todaro migration model to analyze a hypothetical policy. a) We start with the Todaro Migration model, where we have two sectors: manufacturing and agriculture. Draw the main axes for the model, overlaying the initial (no government restrictions) demand curves for labor in the two sectors (let the manufacturing origin be on the right). Let the manufacturing one be ʻʻnormalʼʼ looking but make the agriculture one be horizontal (not necessary but simplifies things). Label the equilibrium wages employments and

b) Now the government intends to limit the employment in the agricultural sector. Why would setting a minimum agricultural wage be infeasible? Explain in detail. c) The government decides to fix agricultural employment at with Let LRS be

the total supply of labor in the rural areas available for agriculture. If LRS > then each laborer has an equal chance of being employed. What is the equation that links possible manufacturing wages and expected wages in agriculture and explain in detail the composition of that equation? d) This equation defines a new effective ʻʻdemand curveʼʼ for agricultural workers in agriculture. Draw and clearly label this line on the graph (ensure that no equilibrium values are negative) and clearly identify the new equilibrium. Identify equilibrium LRS , LM on the graph.

e) Does the intervention in one sector (agriculture) increase or decrease employment in the
other sector (manufacturing)? Fully explain in detail how this is similar or different from the situation in Todaroʼs original model?

4. Solow growth model. Many have criticized the Solow model for not including human capital (learning, education, skills, etc.). Consider the human-capital-augmented growth model in continuous time. Here we assume that evolves as before assumed to grow at a rate of n. human capital evolves Physical capital and labor is

a)Solve for the growth rates. You must clearly show every single step in detail.
i. What is the growth rate of physical capital ?

ii. what is the growth rate of human capital iii.What is the growth rate of output
components?

?
in terms of the growth rates of the three

b) Now look at the economy in equilibrium. i. Assume that physical capital is growing at a rate of gK . Can you express the
growth rate in output in terms of gK ? If so, how?

ii. Assume that human capital is growing at a rate of gH . Can you express the growth
rate in output in terms of gH ? If so, how? iii. How must gH be related to gK ? iv. Solve for gK in terms of initial model constants.

v. If we assume constant returns to scale in aggregate production, does this model
imply a different growth rate than the Solow model without human capital? Explain in detail.