Econ333 Homework 5
Due in your Sakai dropbox by beginning of class on Monday, March 16
Reading for this homework:
“Trade Obstacle Course” the Economist, April 14, 2016. On Sakai
Sterba, James “Coming of Age: In a Village in Java, Modern Ways Change A Coconut Economy” Wall Street Journal, Sept 29, 1987. On Sakai
1a. In the Trade Obstacle Course Economist article (on Sakai) what are two sorts of corrupt activities described/mentioned? Describe how these corruption examples influence economic activities using information in the article.
1b. Roads are a form of physical capital. In Trade Obstacle Course, in what ways does lack of investment in roads slow down economic growth (i.e., increasing production)? Give evidence from the article to support your point. This can be an example of how production (and therefore earning income) is deterred.
- In Coming of Age give two examples of specific things described in this article that you can relate to structural changes that occur in an economy as it has sustained economic growth. Use the PPT on Structural Change for reference.
- What is something many folks would probably think is good that has happened with the growth in Begajah.
- What is something many folks would probably think is bad that has happened with the growth in Begajah.
- We don’t want to forget Lorenz Curves and Gini Coefficients! You know the following information about income distribution in two countries, A and B. This is actual information from the year 2000 for country A and from 2002 for country B (real countries).
Country A Gini: 40.8 Country B Gini: 40.8
The following table plots the percentage of total country income accruing to each quintile of the population.
Lowest 20% 2nd 20% 3rd 20% 4th 20% Highest 20%
A 7.2% 12.7% 17.2% 23.0% 39.9%
B 8.6% 12.3% 16.1% 21.4% 41.6%
- Plot (as neatly as you can) the Lorenz Curves for each country. Plot both Lorenz curves on the same graph.
- Suppose someone asks you, “If you had to be in the lowest quintile, would you want to be in country A or country B?” How would you respond and why? Write a few sentences and give some detail to the “why” part. Relate your answer to a specific definition of poverty (you pick which one).
- Mexico has two main government programs that transfer income to rural households. They are:
PROCAMPO, which pays a set amount per acre to farmers who grew basic grains in a base year prior to the elimination of guaranteed prices. Output price guarantees are not allowed under the North American Free Trade Agreement (NAFTA) or the World Trade Organization (WTO) rules. The idea here was to replace the price support with a direct income payment to farmers, to compensate them for lower grain prices. Direct income payments are allowed, because unlike price supports that raise the price and influence the quantity farmers want to produce and sell, the direct payments are “lump sum” and thus are not expected to affect production (in agricultural policy jargon, they are “decoupled.”) Most PROCAMPO payments go to corn farmers, both those with large farms and those with small farms. For this question, let’s make the assumption that households with small farms are poor, and those with large farms are not poor. Large farms have more acres, so they get more payment than small farms.
OPORTUNIDADES, a conditional welfare program that gives payments to poor women provided that their children are enrolled in schools and in the local health clinic. The idea is to combat poverty in the short run (by giving money to women, we’ll talk about this more later!) and in the long run (by making sure kids get the human capital they need to be productive and make an income when they get older). This has become a model for welfare programs in less-developed countries.
How would you expect each of these public transfer programs to affect (i) income inequality and (ii) absolute poverty in rural Mexico? Explain why. Your discussion of the effect on income inequality should be organized around the 3 things that influence how sources of income affect income inequality (reference pages 126-127 in the T&L text).
- Why is PPP$ GDP typically used when comparing standards of living across different countries with an Aggregate Income measure like GDP? In other words, what is the problem the PPP$ GDP measure is trying to solve? This should be very brief but clear.