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(ECON343)Midterm-Spring2004.pdf
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Midterm Examination
. This exam has five questions. You are required to answer all of them. You have 2 hours and 30 minutes to write this exam.
. The point distribution is as follows:
Question 1: 7 points
Question 2: 15 points
Question 3: 16 points
Question 4: 26 points
Question 5: 36 points
GOOD LUCK !
1. [7 points: 3 + 1 + 3]
Consider the following table comparing Poland and South Africa:
Country
HDI Rank (2001)
GDP per Capita Rank minus HDI Rank (2001)
Gini Coefficient
Income Share of Poorest 40%
Income Share of Richest 20%
Poland
35
17
0.329
20.3%
40.9%
South Africa
111
-64
0.593
8.4%
64.8%
(HDI stands for Human Development Index)
(i) If we consider GDP per capita as the measure of development, then which country was more developed in 2001? Explain clearly.
(ii) If we focus on the broader notion of development C human development, then which country was more developed in 2001?
(iii) What factor might be responsible for this difference in development experiences of the two countries?
2. [15 points: 4 + 10 + 1]
Consider the following Mobility Matrix for 132 countries with 1980 as the base year and 2000 as the current year:
1/4
1/2
1
2
1/4
88
8
4
0
0
1/2
48
43
10
0
0
1
0
28
56
14
3
2
0
0
32
42
26
0
3
3
6
88
[(1) What the categories mean: 1/4 means the situation in which a particular country has 1/4 or less of the world average income; 2 means a countrys income is between the world average and twice the world average; means more than twice the world average, and so on.
(2) The entry 14 in row category 1 and column category 2 tells that 14% of the countries who were between half the world average and the world average in 1980 transited to being between the world average and twice the world average in 2000.]
(i) Point out one important feature about upward mobility of the poorer countries that you observe from the above mobility matrix.
. The Solow growth model predicts that there is a steady-state level of per capita income to which each economy must converge, irrespective of its historical starting point. This is the convergence hypothesis.
(ii) Construct a hypothetical mobility matrix that is consistent with the convergence hypothesis. You must explain the logic of your construction clearly. [Use the same categories as in the above mobility matrix.]
(iii) Is the above mobility matrix consistent with the convergence hypothesis?
3. [16 points: 3 + 5 + 4 + 4]
A country produces its output (Y) using capital (K) and labor (L). Total output is growing at the rate of 5% per year. The real rental rate (that is, th