ECO 2117 Lecture Notes - Lecture 4: Poverty Trap, Human Capital

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ECO2117 lecture 4

January 25th 2016

Comparing Development (part 2 powerpoint)

-workers in the rich world already have capital at their ﬁngertips

-they know how to use their capital

-we have accumulated a lot of capital in the developed world

-what complicates things about accumulating capital in developing countries is the poverty

trap

-to get healthier, more educated, etc, is not that simple

-poverty trap is a problem with human capital

-if one is poor, they do not have money for education, healthcare, etc

-if you are not healthy you are not productive

-if you’re not productive you aren't going to make money

-individuals making no money leads to economic stagnation because of little investment

characteristics of the developing world

-lower levels of living and productivity

-lower levels of human capital

-higher levels of inequality and absolute poverty

-higher population growth rates

-greater social fractionalization

-larger rural populations but rapid rural-to-urban migration

-lower levels of industrialization and manufactured exports

-adverse geography

-underdeveloped ﬁnancial and other markets

-colonial legacy and external dependence

-differences in initial conditions of low income countries today and developed countries then

-physical and human resource endowments

-per capita income and levels of GDP!

climate

-population size, distribution, and growth

-historical roe of international migration

-success of the market economy in Western Europe and North America was based on

internal immigration and on the free ﬂow of people across borders

-today the restriction on mobility is much more intense

-international trade beneﬁts

-scientiﬁc/technological research

-efﬁcacy of domestic institutions

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Document Summary

Workers in the rich world already have capital at their ngertips. They know how to use their capital. We have accumulated a lot of capital in the developed world. What complicates things about accumulating capital in developing countries is the poverty trap. To get healthier, more educated, etc, is not that simple. Poverty trap is a problem with human capital. If one is poor, they do not have money for education, healthcare, etc. If you are not healthy you are not productive. If you"re not productive you aren"t going to make money. Individuals making no money leads to economic stagnation because of little investment characteristics of the developing world. Higher levels of inequality and absolute poverty. Larger rural populations but rapid rural-to-urban migration. Lower levels of industrialization and manufactured exports. Per capita income and levels of gdp. Differences in initial conditions of low income countries today and developed countries then climate.

Related Questions

According to estimates presented in the textbook, which of the following factors made the smallest contribution to U.S. growth between 1928 and 1997?

A) Technology.
B) Human capital.
C) Physical capital.
D) Labor.

According to economist Hernando DeSoto, the lack of formal property rights in many poor countries limits economic growth because informal property rights:

A) lead to excessive investment in physical, social, and human capital.
B) limit the amount that businesses and households can borrow.
C) result in excessive government regulation.
D) decrease the labor force participation rate.

The theory of convergence depends on the assumption that:

A) population growth falls to replacement levels in all nations.
B) factors of production are mobile across borders.
C) technological advancement slows.
D) production functions have constant returns to scale.

The surge in foreign direct investment experienced by China and India in the early 2000s can best be explained by:

A) their higher marginal productivity of capital, which leads to lower production costs.
B) their lower marginal productivity of capital, which leads to lower production costs.
C) the limits they impose on factor mobility.
D) technological agglomeration.

The idea behind Say's Law is that people work because:

A) they like to work.
B) they want to buy things.
C) they want to accumulate wealth.
D) work gives them social status.

People's knowledge is a type of capital, called human capital.

A) True
B) False

The law of diminishing marginal productivity applies whenever:

A) output is increased.
B) all inputs are increased.
C) only one input is increased.
D) decreasing returns to scale are present.

13.

The theory of convergence argues that poor nations should, if they pursue the right policies,

A) grow at the same rate as rich nations.
B) grow faster than rich nations.
C) develop the same social-welfare structures as rich nations.
D) stop their exploitation by the rich nations.

14.

If increasing returns to scale exist, then an increase in output of exactly 3 percent is most likely to be produced by:

A) a decrease in all inputs of 3 percent.
B) an increase in all inputs of less than 3 percent.
C) an increase in all inputs of 3 percent.
D) an increase in all inputs of more than 3 percent.

15.

The production function is best represented in the following form:

A) Output = A.
B) Output = f(Labor, Capital, Land).
C) Output = A%u2022f(Labor, Capital, Land).
D) Output = [A%u2022f(Labor, Capital, Land)]^b.

16.

The effect of economic growth generally has been to make:

A) the poor poorer and the rich richer.
B) the poor richer and the rich poorer.
C) all income levels richer.
D) the rich richer but not affect the poor.

Scale economies describe what happens to output when:

A) one input changes.
B) all inputs change by the same percentage.
C) technology changes.
D) institutions change.

WRITE a one-sentence summary of each paragraph!

The False Income-Inequality Narrative

BY JASON L. RILEY

Published in the Wall Street Journal on Sept. 29, 2015

An enduring theme of the Democratic presidential race has been income inequality, coupled with an enduring belief that America's affluent reached their status at the expense of the poor and the middle class.

Bernie Sanders speaks of little else on the stump. And when not busy dissembling on her handling of email correspondence at the State Department, Hillary Clinton will tell you that the deck is still stacked in favor of those at the top. If Joe Biden gets in, expect more of the same. The vice president is said to be contemplating a 2016 bid in large part because struggling middle-income families may have trouble relating to Mrs. Clinton on inequality given her high living since leaving the White House.

This theme, in any case, seems to resonate with voters, which is no huge shock in the sixth year of an economic recovery. Envy and resentment fuel class warfare and lackluster economic growth throughout the Obama presidency have made people less optimistic and more inclined to fault others for their circumstances. A Wall Street Journal/NBC News poll this week reports that four-in-five Americans âwere either angry because our political system seems to only be working for the insiders with money and power or anxious and uncertain. After all, the economy still feels rocky and unpredictable or both.

Liberals want to address income disparities through wealth redistribution by taking money from more productive people and giving it to the less productive in the name of fairness as the left defines it. They want to raise income taxes, expand the welfare state, lift minimum wages, and strengthen the bargaining power of unions. Mr. Sanders has been the most explicit about this, even going so far as to propose a wealth tax. Our economic goals have to be redistributing a significant amount of [wealth] back from the top 1%, the senator said in July.

In reality, the left has overstated the problem. And all the focus on divvying up existing wealth instead of creating more risks making matters far worse for the people they are trying to help and the country in general. To the extent that the expanding welfare state allows more people to live without working and therefore without earning income or developing their own human capitalâsupporters of the welfare state are contributing to the very income disparities they so much decry, writes economist Thomas Sowell in his new book, âWealth, Poverty and Politics.

Mr. Sowell is the author of more than 30 books over the past four decades, many having to do with what drives different social and economic outcomes among different groups in the U.S. and elsewhere. In his latest tome, he draws from this well of research to do what he has done so well for so long: question basic assumptions behind public policy and follow the facts where they lead him.

One common assumption is that proportionate or random outcomes are the natural order of things and that gaps or disparities are evidence of something wrong. In fact, huge disparities are the norm, not the exception, because the demographic, cultural, and political factors that influence the development of the human capital that makes people productive also tend to be unequal.

In 2013, only 9% of U.S. women with college degrees who gave birth were unmarried, versus 61% of women who were high-school dropouts and unmarried. Harvard's Robert Putnam reports that children from professional families will hear 19 million more words than their working-class peers before the first day of kindergarten.

These children don't have the same prospects. Equal opportunity, in the sense of being judged and rewarded by the same standards as others, cannot possibly mean equal life chances for children born and raised in these very different settings,writes Mr. Sowell. The fact that life is unfair is not the same as saying that a particular institution, or a particular society, is unfair.

The argument that social mobility is a thing of the past in the U.S. also is disputable. Longitudinal studies by the IRS and others that measure the progress of individuals over time show that the American dream is alive and well. One such paper, published by the Pew Charitable Trusts in 2012, measured whether a person has more or less income, earnings, or wealth than his or her parents did at the same age and concluded that the vast majority of Americans had higher incomes, while 50% had greater wealth.

In other studies, Pew has found generational stagnation but the authors have noted that it didn't apply to immigrants. If low-income immigrants can rise even when the native-born don't, writes Mr. Sowell, that strongly suggests that American society continues to offer opportunities to move up economically, but that not all groups make the same use of these opportunities.

Mr. Riley, a Manhattan Institute senior fellow and Journal contributor is the author of Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (Encounter Books, 2014).

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ECO 2117 Lecture Notes - Lecture 4: Poverty Trap, Human Capital

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