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Tutorial 8 ans

Economics Of Developing Countries (La Trobe University)

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ECO2EDC
Tutorial 8 – Answers
Topics: Population and Human Capital: Education
1. What are the economic reasons that help to explain why developing countries tend to have
higher population growth rates than developed countries? (Population)
2. Is it in society’s interests to limit population growth? Why or why not? Justify your answer.
(Population)
3. What is the difference between the private and social rates of return to education? Explain
how this varies between developed and developing countries. (Human Capital: Education)
4. It has been suggested that there is a misallocation of resources in terms of government
spending on education. Discuss. (Human Capital: Education)

1. Answer should include a discussion of the microeconomics of fertility including the benefits
of an additional child such as a source of labour in the household or outside (working in the
fields, taking care of animals, watching siblings etc.), form of social security in old age, high
mortality rate that may result as an incentive to have more children.
The answer may also include considerations of the costs of bearing children (direct and
opportunity costs). Other considerations may relate to factors like poor education level that
limits family planning or market failures that reflect on the price of contraceptives and how
this explains differences in population growth rates between developed and developing
countries.
2. The answer could present a variety of views – but needs to be well justified.
If yes – then discussion could include:
– Malthusian predictions
– Solow model - decrease in the capital per worker
– Slower fertility rate – lower dependency ratio
– Reduces savings rates
– High population absorbs limited government resources
If no – the answer should include a discussion that it is poverty and other social issues that
are the problem – or even the optimistic view:
– Higher population generates higher level of demand (facilitates economies of scale)
– Population pressure may induce technological change
– Larger populations contain more entrepreneurs, creators and innovators

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3. The answer could include a diagram to illustrate – or/and a discussion. Should outline the
returns that accrue to private individuals – e.g. difference in the income stream with
education and without – less costs. Present value (PV) and internal rate of return (IRR) are
used to conduct analyses and comparisons of the return of education at different levels,
across countries, etc. Positive externalities add to the private benefits of education.
Government expenditure on education adds to the direct and indirect private costs. The
positive externalities are difficult to measure. However, externalities are an important
reason why government subsidizes education at all levels. Individuals only observe their
private benefits and invest accordingly, while the government also considers the benefits to
the society.

The empirical literature suggests that both the social returns and private returns are much
higher in developing countries compared to developed countries. Further that these returns
are attractive compared to other investments.
4. There are three main signs of potential misallocation in terms of government expenditure on
education.
The first one relates to expenditure across levels: primary, secondary and tertiary education.
The discussion centres on the fact that different levels of education may offer different

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returns and whether governments are correctly allocating resources that reflect these
differences.
The second sign of potential misallocation is the gap between government expenditures and
enrollments. Comparisons across countries show significant variations that could be
attributed to inefficiencies in the allocation of resources to education.
The third potential source of misallocation is that many countries fully subsidize education,
including the tertiary level. Subsidies usually do not distinguish between students who can
pay for their education and students who can’t. Some believe that this represents a
misallocation of resources.

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