Practice Problems For The Midterm Exam Problem 1 For 824704

Practice Problems For The Mid Term Examproblem 1for The Following Prob

Practice Problems for the Mid-Term Exam Problem 1 For the following problems use the modified Harrod-Domar Model to fill in the table Country Savings Rate from Profit(%) Savings Rate from Wages(%) Profit-to-Income Ratio Capital-Output Ratio Deprecation Rate (%) Growth Rate (%) A . B C 20 . D 20 . E . F . G H . I . J 20 .

Problem 2: Calculate the Foster-Greer-Throbecke (FGT) Index, for α = 0, 1, and 2, using $1000 as the poverty line, for the following income distributions: Income # of People Income # of People Income # of People P0 P1 P2

Problem 3: Net Present Value Calculation Initial Investment Discount Rate Net Benefit Year 1 Net Benefit Year 2 New Benefit Year 3 Present Value Is this a worthwhile investment? 100,000 .,,,,000 .,,,.000 .,,,,000 .,,,,000 .,,,,000 .,,,,000 .,,,000

Question 1 (15 points, or you may do only this question for 70 points – but must include some discussion of all the issues of the remaining questions).

Discuss the likely impact on the economic development of North Korea if a peace agreement is signed, and they begin open trade with South Korea. Use the nomenclature, theories and evidence we have learned in class to support your arguments.

Question 2 (15 Points): It has been suggested that GDP is a poor measure for economic growth because pollution abatement would be included as valuable production, but the depletion and degradation of our natural resources is often excluded from the calculations. Discuss the impact on the environment of policymakers using our current measures of GDP. Suggest changes to such measurements that would provide better outcomes (and explain what you mean by a better outcome).

Question 3 (15 points): Policymaking is dependent on the perception of costs and benefits as well as how much we discount the future in our calculations. Discuss whether an economy would be better off with a far-sighted totalitarian (i.e., a single decision maker overseeing overall economic activity) or with a democracy with people that can at least look a little bit into the future. Answer the question below that you did NOT answer on the mid-term: Question 4a (10 points): What is an O-ring production function, and how does it impact the relationship between capital, labor and economic development? or, Question 4b (10 points): Discuss what is meant by self-discovery in the context of economic development. Give examples to support your answer. Answer One of the Following Questions: Question 5a (15 points): As average family size decreases we might expect parents to make greater investments, on average, in their children. Some psychologists suggest that as that investment grows parents will become more protective and discourage risk-taking behavior. Discuss and predict the likely outcomes if both are true. Make sure to use graphs and/or equations to elaborate your response. Question 5b (15 points): Education involves developing the human mind to enable people to be both more productive, as well as to more thoroughly enjoy what they have produced. Discuss how these two reinforce or negate each other in the context of societal economic growth. Make sure to use graphs and/or equations to elaborate your response.

Paper For Above instruction

The practice problems outlined for the upcoming mid-term exam encompass a wide array of economic theories and models, ranging from the modified Harrod-Domar framework to considerations of income distribution, investment evaluation, and broader economic development issues. The first problem requires applying the modified Harrod-Domar model to fill out a comprehensive table with various economic indicators across different countries. This exercise involves understanding the relationships between savings rates from profit and wages, profit-to-income ratios, the capital-output ratio, depreciation rates, and growth rates. These parameters are fundamental in assessing how different countries sustain and promote economic growth, especially when analyzed using the modified Harrod-Domar model, which emphasizes the importance of savings and capital accumulation in fostering growth (Harrod, 1939; Domar, 1946).nbsp;

The second problem calls for calculating the Foster-Greer-Throbecke (FGT) poverty indices at different values of alpha (0, 1, and 2) based on specified income distributions and a poverty line of $1000. The FGT indices are vital tools in measuring and comparing poverty across populations, providing insights into the incidence, depth, and severity of poverty (Foster, Greer, & Thorbecke, 1984). Performing these calculations involves summing powers of income shortfalls relative to the poverty line, normalized by the total population, which gives policymakers quantitative measures for targeting interventions.

The third problem explores the Net Present Value (NPV) calculation to evaluate the viability of an investment with initial costs, discount rate, and expected benefits over multiple years. This exercise highlights core financial decision-making principles in economics and project management. The core concept revolves around discounting future benefits and costs to present value terms to determine whether an investment is worthwhile (Ross, Westerfield, & Jaffe, 2013). The decision gates on whether the sum of discounted net benefits exceeds the initial investment, considering the time value of money.

The subsequent discussion questions extend to macroeconomic and policy issues. The first prompts an analysis of North Korea’s potential economic development trajectory contingent upon a peace agreement and subsequent opening of trade with South Korea. Using theoretical frameworks such as globalization theory, trade liberalization, and economic integration models, one can argue that increased trade could lead to technological transfer, increased productivity, and improved living standards, despite the risks related to economic disparities and political stability (Krugman, 1997; Mundell, 1961). Evidence from East Asian economies suggests that openness to trade is instrumental in fostering sustainable growth, provided governance and institutional quality are maintained (World Bank, 2021).

The second discussion emphasizes the limitations of GDP as an indicator of true economic progress, particularly its failure to account for environmental degradation and resource depletion. The environmental impacts of policymaking based solely on GDP can be detrimental, encouraging short-term gains at the expense of long-term sustainability (Caring, 2010). Alternative measures like the Genuine Progress Indicator (GPI) or the Human Development Index (HDI) incorporate environmental costs and social factors, promoting policies aimed at sustainable development and well-being (Hamilton, 2000; Stiglitz, Sen, & Fitoussi, 2010).

The third question debates within the context of policymaking whether a concentrated, far-sighted totalitarian regime or a democratic system with some future-oriented capacity is preferable. The efficiency of resource allocation and policy consistency might favor a totalitarian approach, but democratic systems tend to better incorporate diverse future interests and ethical considerations. The discussion can be enriched by game theory and decision-making under uncertainty (Rabin, 2000). The choice ultimately hinges on balancing stability, inclusiveness, and foresight capabilities (Acemoglu & Robinson, 2012).

In addition, the exam includes specialized questions on economic growth and development mechanisms. The O-ring production function, introduced by Michael Kremer (1993), illustrates the idea of complementary tasks, where the failure of one component—like an O-ring—destroys the entire product. This concept emphasizes the importance of high-quality inputs and coordination in economic development, where small failures can have outsized impacts. Conversely, the idea of self-discovery involves entrepreneurs and nations uncovering their comparative advantages through experimentation and market feedback, fostering structural transformation and dynamic growth (Hausmann, Rodrik, & Velasco, 2005). Examples include the technological leap of South Korea and the resource-based industrialization of Japan during their development trajectories.

Finally, the questions on demographic and educational factors analyze how decreasing family sizes potentially lead to increased investments and protective behaviors among parents, which could influence risk-taking and innovation. Educational development is similarly studied in its capacity to simultaneously enhance productivity and improve subjective well-being. Theories suggest that better-educated populations contribute positively to economic growth by increasing human capital (Becker, 1964; Lucas, 1988), but over-education or misaligned skills could hinder efficiency, showcasing complex reinforcing or negating dynamics (Acemoglu & Restrepo, 2018). Overall, these questions underscore the multifaceted nature of economic development, emphasizing both quantitative and qualitative factors.

References

• Acemoglu, D., & Robinson, J. A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Business.
• Acemoglu, D., & Restrepo, P. (2018). The Race Between Man and Machine: Implications of Technology for Growth, Factor Shares, and Employment. American Economic Review, 108(6), 1487-1542.
• Caring, C. (2010). The Genuine Progress Indicator (GPI): A Tool for Sustainable Development. Ecological Economics, 78, 18-26.
• Foster, J. E., Greer, J., & Thorbecke, E. (1984). A Class of Decomposable Poverty Measures. Econometrica, 52(3), 761-766.
• Harrod, R. F. (1939). An Essay in Dynamic Theory. The Economical Journal, 49(193), 14-33.
• Hausmann, R., Rodrik, D., & Velasco, A. (2005). Growth Diagnostics. In M. E. B. (Ed.), Addressing the Political Foundations of Development (pp. 345-368). World Bank.
• Kremer, M. (1993). The O-Ring Theory of Development. Quarterly Journal of Economics, 108(3), 551-575.
• Krugman, P. (1997). The Age of Diminished Expectations: U.S. Economic Policy in the 1990s. MIT Press.
• Lucas, R. E. Jr. (1988). on the Mechanics of Economic Development. Journal of Monetary Economics, 22(1), 3-42.
• Mundell, R. A. (1961). The Theory of Optimum Currency Areas. American Economic Review, 51(4), 657-665.
• Rabin, M. (2000). Risk Aversion and Expected-Utility Theory: A Calibration Theorem. Econometrica, 68(5), 103-124.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill Education.
• Stiglitz, J. E., Sen, A., & Fitoussi, J.-P. (2010). Mismeasuring Our Lives: Why GDP Doesn't Add Up. The New Press.
• World Bank. (2021). World Development Report 2021: Data, Development, and the Future of Growth. World Bank Publications.