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ECO2117 midterm review- with supplementary notes.docx

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University of Ottawa
Oloufade Djoulassi

ECO2117C Development Countries (REVIEW) Lecture 1: Introducing Economic Development: A Global Perspective Questions 1. Meaning of development economics? A branch of economics that focuses on improving the economies of developing countries. Development economics considers how to promote economic growth in such countries by improving factors like health, education, working conditions, domestic and international policies and market conditions. It examines both macroeconomic and microeconomic factors relating to the structure of a developing economy and how that economy can create effective domestic and international growth. 2. What characterize developing countries? There are significant social and economic differences between developed and developing countries. Many of the underlying causes of these differences are rooted in the long history of development of such nations and include social, cultural and economic variables, historical and political elements, international relations, and geographical factors. According to the UN, a developing country is a country with a relatively low standard of living, undeveloped industrial base, and moderate to low Human Development Index (HDI). This index is a comparative measure of poverty, literacy, education, life expectancy, and other factors for countries worldwide. The index was developed in 1990 by Pakistani economist Mahbub ul Haq, and has been used since 1993 by the United Nations Development Programme in its annual Human Development Report. The HDI measures the average achievements in a countwo basic dimensions of human development:  A long and healthy life, as measured by life expectancy at birth.  Knowledge, as measured by the adult literacy rate (with two-thirds weight) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weight). Development entails a modern infrastructure (both physical and institutional), and a move away from low value added sectors such as agriculture and natural resource extraction. Developed countries usually have economic systems based on continuous, self-sustaining economic growth and high standards of living. 3. Differences between political economics and traditional neoclassical economics? Economics is the study of trade where limited resources are available. Political and neoclassical economics are two separate branches of economics. Neoclassical economics presents foundational theories of economics that have been adopted into the mainstream understanding of how an economy works. This branch of economics forms the basis for the field of microeconomics. Political economy deals with macroeconomic forces in the economy, such as unemployment and monetary policies. Read more: economics.html#ixzz2KqcQDWGp 4. Show the differences between gross domestic product (GDP), gross national income (GNI) and income per capita. GDP: The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX where: "C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending "I" is the sum of all the country's businesses spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports) GNI: Gross national income (GNI) is GDP less net taxes on production and imports, less compensation of employees and property income payable to the rest of the world plus the corresponding items receivable from the rest of the world (in other words, GDP less primary incomes payable to non- resident units plus primary incomes receivable from non-resident units). An alternative approach to measuring GNI at market prices is as the aggregate value of the balances of gross primary incomes for all sectors; (note that gross national income is identical to gross national product (GNP) as previously used in national accounts generally). Income per capita: Per capita income, more simply known as income per person, is the mean income within an economic aggregate such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or Gross national income) and dividing it by the total population. 5. What are the Millennium Development Goals (MDGs)? The Millennium Development Goals (MDGs) are eight international development goals that were officially established following the Millennium Summit of the United Nations in 2000, following the adoption of the United Nations Millennium Declaration. All 193 United Nations member states and at least 23 international organizations have agreed to achieve these goals by the year 2015. The goals are: 1. Eradicating extreme poverty and hunger, 2. Achieving universal primary education, 3. Promoting gender equality and empowering women, 4. Reducing child mortality rates, 5. Improving maternal health, 6. Combating HIV/AIDS, malaria, and other diseases, 7. Ensuring environmental sustainability, and 8. Developing a global partnership for development. 6. According to Douglass, what is the meaning of institutions? Douglass Cecil North (born November 5, 1920) is an American economist known for his work in economic history. Douglass defines institutions as “humanly devised constraints that structure political, economic and social interactions.” Constraints, as North describes, are devised as formal rules (constitutions, laws, property rights) and informal restraints (sanctions, taboos, customs, traditions, code of conduct), which usually contribute to the perpetuation of order and safety within a market or society. The degree to which they are effective is subject to varying circumstances, such as a government's limited coercive force, a lack of organized state, or the presence of strong religious precept. Lecture 2: Comparative Economic Development Questions 7. What are the basic indicators of development? GDP per capita, Life expectancy, Literacy Rates, Measures of Poverty, Demographic indicators, Disease indicators. 8. Purchasing Power Parity (PPP)? Purchasing power parity (PPP) is an economic theory and a technique used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency's purchasing power. 9. According to the classification of the World Bank based GNI, which countries are developed and which countries are developing (less developed)? 10. What is the Human Development Index (HDI)? Discuss about its components and some of the critics against its calculation. The Human Development Index (commonly abbreviated HDI) is a summary of human development around the world and implies whether a country is developed, still developing, or underdeveloped based on factors such as life expectancy, education, literacy, gross domestic product per capita. The results of the HDI are published in the Human Development Report, which is commissioned by the United Nations Development Program (UNDP) and is written by scholars, those who study world development and members of the Human Development Report Office of the UNDP. According to the UNDP, human development is “about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value.” Criticism of calculations: Throughout its time in use, the HDI has been criticized for a number of reasons. One of them is its, failure to include ecological considerations while focusing online on national performance and ranking. Critics also say that the HDI fails to recognize countries from a global perspective and instead examines each independently. In addition, critics have also said that the HDI is redundant because it measures aspects of development that have already been highly studied worldwide. Despite these criticisms, the HDI continues to be used today and is important because it consistently draws the attention of governments, corporations and international organizations to portions of development which focus on aspects other than income like health and education. Learn more at: 11. Country convergence? The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income. Developing countries have the potential to grow at a faster rate than developed countries because diminishing returns (in particular, to capital) aren't as strong as in capital rich countries. Furthermore, poorer countries can replicate production methods, technologies and institutions currently used in developed countries. In the economic growth literature the term "convergence" can have two meanings however. The first kind (sometimes called "sigma-convergence") refers to a reduction in the dispersion of levels of income across economies. "Beta-convergence" on the other hand, occurs when poor economies grow faster than rich ones. Economists say that there is "conditional beta-convergence" when economies experience "beta-convergence" but conditional on other variables being held constant. They say that "conditional beta-convergence" exists when the growth rate of an economy declines as it approaches its steady state. Lecture 3: Classic Theories of Economic Growth and Development Questions 12. Mention the assumptions behind each classic theory of economic growth  The linear-stages-of-growth model (1950’s and 1960’s);  Theories and patterns of structural change (1970’s);  The international-dependence revolution (1970’s);  The neoclassical model (1980’s);  Endogenous growth theories (1990’s);  Today’s approach draws on all perspectives. 13. What are the main results of each theory? Point out some of the critics. (answer from lecture3) a. Harrod - Domar growth model : To grow, economies must save and invest. The more they save, the more they can invest, and the faster they can grow. Fundamental strategy: increase savings as a proportion of national income. Obstacle: low level of domestic saving. Limitations: Two other components of growth are labor force and technological progress; Labor force is not described explicitly in this model; Labor force is assumed to be abundant in developing country; Capital output ratio (level of technological progress) is constant, in the longer run this ratio can change; More saving and investment is necessary condition for higher growth but not a sufficient condition; For example, missing variables are skills, managerial and planning capacities. b. Lewis two-sector model The Lewis two-sector model deals with the structural transformation of subsistence economy; Model: Underdeveloped economy consists of two sectors: Traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity; There is surplus labor in the traditional agricultural sector; Modern urban industrial sector characterized by high productivity; The model focuses on the process of labor transfer and the growth of output and employment in the modern sector; Industrial investment and capital accumulation are important for output expansion in the modern sector. Further details: It is assumed that capitalists reinvest all their profits; Level of wages in the modern sector is constant; There is also a fixed average subsistence level of wages in the agricultural sector; Supply curve of rural labor to the modern sector is perfectly elastic, given the constant urban wage. Limitations: Assumption: labor demand rises proportionally with capital accumulation; but capitalist profits can be reinvested in laborsaving capital equipment; Assumption: surplus labor in traditional agricultural sector and full employment in urban sector, but research suggests this is not the case; Assumption: constant urban wages, but urban wages tend to rise; Assumption: diminishing returns in urban sector, but there is evidence of increasing returns. c. Market-friendly approach Part of the neoclassical counter theories… Market-friendly approach (by the World Bank in the 90s): recognizes that there are imperfections in product and factor markets (market failures); Differs from the previous neoclassical approaches; Selective interventions of governments are needed to create an environment in which markets can operate efficiently. d. Neoclassical counterrevolution The neoclassical counterrevolution includes three component approaches: - The free-market approach; - The public-choice (new political economy) approach; - The market-friendly approach; Example: Solow neoclassical growth model e. False-paradigm model According to this model, underdevelopment is perpetuated through: Faulty and inappropriate advice by: Uninformed, biased international expert advisers (assistance agencies, multinational donor organizations); Inapplicable theoretical models; Irrelevant Western concepts and models based on capital accumulation or market liberalization without consideration to social and institutional changes. f. Dependence The Neocolonial Dependence Model: It states that underdevelopment is attributable to unequal power relationships between: - The center (developed countries); - The periphery (developing countries); Small elite ruling class (entrepreneurs, military rulers, salaried public officials, trade unions leaders, etc): - High incomes, social status and political power; - Their interests perpetuate the international capitalist system of inequality. g. Dualism The Dualistic-Development Thesis: It highlights the existence and persistence of substantial and increasing divergences between:  Rich and poor nations;  Rich and poor people;  Modern and traditional economic sectors;  Growth and stagnation;  Higher education and large scale illiteracy. Criticism: They offer no alternative solutions to development; - There are bad experiences of revolutionary campaig
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