Final Review
Final exam dates:
Class beginning at 8.15 am:
Tuesday, May 10: 10.30 am to 12.30 pm. Class beginning at 9.20 am:
Wednesday: May 11: 3.30 pm – 5.30 pm.
Class beginning at 1.40 pm:
Monday, May 9: 10.30 am to 12.30 pm. 1 Final Exam
1. 5 questions to choose from a set of 7
questions.
2. This will be a blue book exam, like the
midterm exam.
3. Chapters: 7 through 12
4. Please do not forget to do online evaluation
of this course. This is extremely important. 2 Chapter 7: Urbanization and Urban-Rural Migration 1. Define agglomeration and its effects on cities
and towns.
• Agglomeration = concentration of population,
labor, industries and markets in an urban area
(city or town)
• Effects: Overcrowding, traffic congestions,
increased travel time, higher rents, higher cost
of living, growth of slums, pollution etc.
•
3 2. Mention any two reasons why agglomeration takes place in developing countries. • Reasons: (1) Firms generally want to be in the same place so that they can learn from each
other.
• Clubs, associations are good for making business contacts. Example: Silicon Valley in
California. Software firms in Bangalore (India)
• (2) Large population (large working population) living in an urban area makes it easier for
companies to find workers, particularly skilled workers.
• (3) Large population means large markets, where the goods can be sold with low transport
costs.
• (4) Sometimes, a city or town grows near the source of raw material– like coal or steel towns
(5) Social Capital : Roads, bridges, financial system (banks, insurance companies). Government
often provides social capital where agglomeration is taking place. This leads to growth of
formal as well as an informal sector. 4 3. What is the meaning of ‘first city bias’?
• When the cost of doing business in an urban center
rises sharply, it may result in the development of a
new urban core, near the main city.
• This may face chicken-and-egg problem--• Initially, the cost of settling in a new area may be
more costly, so everyone waits for the pioneers to
start the process.
• Eventually, the second city does grow, but it never
outgrows the first city--- first city bias.
5 4. Briefly discuss Paul Krugman’s view that greater openness may
control the tendency towards ‘urban giantism’.
• Giantism = Concentration of urban population in and around first
and second cities.
• 1. Capital city generally get located in the middle of the country, so
that it becomes easier for the ruler to control every part of the
country.
• 2. Rent seeking and capital market failure make the creation of
new urban centers practically impossible.
• 3. Paul Krugman: Import substitution industrialization under the
protection of tariff and import control minimizes the size of foreign
trade. The entire economic activity rests of the domestic markets.
6 • Firms prefer location where most consumers live or
where it is easy to hire workers. This leads to
agglomeration.
• International trade changes these calculations.
When development gets linked to the world
markets, there is no particular advantage in urban
agglomeration. When the raw materials are
imported and goods are sold in the world markets,
firms may prefer a location near the border or a sea
port or a river port.
7 8 5. The graph drawn above is related to the Harris-Todaro model of rural to
urban migration. The curve RR’ is the demand curve for rural labor and the
curve UU’ is the demand curve for urban labor. These demand curves show
the marginal productivity of labor on the vertical axis. The economy has 100
million urban and rural workers, who are looking for jobs. Assume that the
labor markets are perfectly competitive. (i) Then what would be the rural as
well as the urban wage rate and how many people would be employed in
the rural and urban sectors? Will there be full employment in the economy?
(ii) Now assume that the wage rate in the urban sector get pushed up to 72
in food units due to institutional factors. Then how many will get
employment in the urban sector? (iii) What would be the probability of
getting an urban job? (iv) In the new wage equilibrium, what would be the
rural wage rate and the size of rural employment? (v) Will the economy be in
full employment? If not, how many workers will be unemployed?
9 (i) Rural as well as urban wage rate will be 10 in
food units and 70 million people will work in
the rural sector and 30 million people will
work in the urban sector.
(ii) 10 million.
(iii) 10/60 = 1/6
(iv) Rural wage = (1/6) x 72 =12
(v) Unemployment = 50 million workers.
10 Chapter 8: Human Capital: Education and Health in Economic Development 1. The roles of education and health in economic development are
interrelated. Write about this interrelationship.
Health and education are investments made in the same individual.
Greater health capital may raise investment made in education in several
ways:
i) Health in an important factor in school attendance.
ii) Healthier children are more successful in school and learn more
efficiently.
iii) Deaths of school-age children also increase the cost of education per
worker.
iv) Longer life spans raise the return to investment in education.
v) Healthier individuals are better able to use education at any point in life. 11 Greater educational capital may raise return to
investment in health in the following way:
i) Many health programs rely on skills learned in
schools ( including literacy and numeracy)
ii) Schools teach basic personal hygiene and
sanitation.
iii) Improvements in productive efficiency from
investment in education raise the return on
lifesaving investment in health.
12 2. Discuss any two factors that determine the demand
for education.
1. Wage or income differentials
2. Probability of success in finding a modern-sector
employment
3. Direct private cost
4. Indirect or opportunity cost
Non-economic factors: cultural traditions, gender and
social status, education of parents, size of family.
13 3. What is the process of over-certification? Briefly describe it. What are
its effects on the distribution of education in developing countries?
1. Start with substantial wage gaps between primary and secondary
school graduates, between secondary school and college graduates
and so on.
2. The rate of increase in modern sector jobs for primary school
graduates is less than the rate at which the supply of primary school
graduates rises. The same is true for secondary school graduates and
college graduates, etc.
3. Employers face an excess of applicants for all available jobs. They
respond by raising the educational qualification requirements for all
categories of jobs: high school degree, where only a primary school
degree is enough for job performance, college degree, where only a
high school degree is enough, etc.---- Over-certification
14 Governments, under the political pressure from the educated, bind
wage rate to the educational attainment of the job seekers, rather
than to the minimum educational qualification required for the
job.
5. School fees at the early primary level of education are nominal or
close to zero, rises at late primary and secondary level and then
decline at the college and higher educational levels.
These conditions prevail in most developing countries. Examples:
Mexico, Egypt, India, Pakistan, Ghana, Nigeria and Kenya.
Implications: Expected private return from education far exceeds
the private cost. The gap rises with the level of education. This
causes extreme inequality in the distribution of education.
15 16 17 4. The diagram drawn above shows the market for unskilled labor
in which child workers may get hired, depending upon the
circumstances. Currently, there are 10 million adult workers
who are available for employment at the equilibrium wage rate
of $2.00 per hour and no child worker is in the labor force in
this market. (i) If the employers offer a wage rate of $1.50 and
no child worker is allowed to work, how large will be the
shortage of unskilled labor? (ii) Assume that it is legal to employ
a child worker and that the productivity of a child worker is ½ of
the productivity of an adult worker. Then, how many child
workers would be working at this lower wage rate of $1.50?
How much would a child worker earn per hour?
18 (i) Shortage = 24 – 10 = 14 adult workers
(ii) 14 x 2 = 28 child workers
A child worker will earn ½ x $1.50 = $0.75 per
hour.
5. What are the alternatives to a complete ban
on child labor? 19 1. Child labor is an expression of poverty. Deal with poverty
first--- The World Bank
2. Get more children to school--- night schools, cash incentives
for parents to send children to school. Probably better than
the idea of compulsory education. Some international
agencies support this strategy.
3. Child labor is inevitable, at least in the short run. Provide
support system (prevent child abuse, illegal child trafficking,
prevent economic exploitation of the child)-----UNICEF
4. ILO : Favors child labor ban, at least in its most abusive form. 20 6. What are the health challenges faced by the developing nations?
1. Absolute poverty: classified as a disease according to international
classification of diseases: code Z59.5---extreme poverty.
2. Malnutrition: It is the root of many diseases. 800 million people
suffer from malnutrition and 2 billion people suffer from
micronutrient deficiency.
3. AIDS: Acquired immunodeficiency syndrome (also HIV: Human
immunodeficiency virus)
It is now the leading cause of death among working age population in
the developing world. Hardest-hit region: Sub-Saharan Africa.
4. Malaria: Once in retreat, now a deadly strain has come back,
particularly in Africa. Kills over one million each year, 70% of them
being under-5.
21 5. Tuberculosis: Claims about 2 million lives each
year.
6. Acute lower respiratory infections: primarily
pneumonia, accounts for 20% of deaths
among children under age 5.
7. Hepatitis-B: Predicted to kill about one million
people.
8. Cholera: A come-back story like malaria
Other important diseases: Dengue, Leprosy, etc.
22 Chapter 9 : Agricultural Transformation and Rural Development 1. Explain the following terms: subsistence farming,
shifting cultivation, Latifundios and minifundios.
Subsistence Farming: Farming in which crop production
and other activities are conducted mainly for personal
consumption. The traditional farming techniques leads
to low land productivity.
Shifting Cultivation: Tilling land until it has been
exhausted of fertility and then moving to a new parcel
of land, leaving the former land to regain fertility until
it can be cultivated again.
23 Latifundios: Very large land holding capable of
employing at least 12 workers and up to 1000
workers. The owners are often more concerned
with power and prestige, rather than land
productivity. High transaction cost (cost of
supervising labor in such large land areas)
Minifundios: The smallest farms, not even large
enough to provide employment for a single
family.
24 1. How would you define ‘land Gini’? Explain
why land Gini is so much higher in Latin
America, compared to Asia. 25 26 Land Gini coefficient is measured by ½ the area
enclosed by the diagonal and the lorenz curve. 27 Land Distribution: Asia and Latin America
Gini coefficient Bangladesh Average Farm Size
(hectares)
1.6 India 2.3 0.62 Indonesia 1.1 0.56 Nepal 1.0 0.56 Philippines 3.6 0.51 Thailand 3.7 0.45 Brazil 59.7 0.84 Costa Rica 38.1 0.82 Colombia 26.3 0.86 Peru 16.9 0.91 Uruguay 214.1 0.82 Venezuela 91.1 0.91 0.42 28 A large part of Latin America has the system of
Latifundios, resulting in large landholding
among a few rich farmers. In Asia, subdivision
and fragmentation of land has been the result
of rapid population growth and land
acquisition by village money lenders. The
colonial system of large landlords, who
collected taxes on behalf of the colonial rulers,
was abandoned in the post colonial period.
29 3. Currently agriculture performs a supporting
role for the rest of the economy in developing
countries. Mention any two of these
supporting roles. 30 1. Product contribution: To provide inputs for the industry, like raw cotton for
textiles, food for food processing.
2. Foreign exchange contribution: agricultural export revenues used to import capital
goods for the industry.
3. Product market contribution: rising rural incomes generate additional demand for
manufactured goods.
4. Factor market contribution: Surplus labor moves out of agriculture and gets
absorbed in industrial occupation. When surplus labor is exhausted, some part of
agriculture may be run on profit motive and farm profit may get invested in
industry (Lewis Model).
5. The effect of all this process is a decline in the relative importance of
agriculture.----considered as an indicator of development.
6. Current view: agriculture should a more active role, rather than a supportive or
passive role. Without an integrated rural development, industrial growth causes
severe imbalances in the economy and the society.
31 4. Distinguish between a tenant farmer and a sharecropper.
Whose exposure to risk is greater and why?
Fixed Rent Tenancy: The farmer does not own land, gets a
piece of land from a big landowner and pays a fixed
rent. The farmer is exposed to risk, the big landowner
has no risk.
A sharecropper does not own land, gets a piece of land
from a big landowner in exchange for a share of crop
produced that must be given to the big landowner. The
share is contractually determined. This results in risksharing.
32 5. Briefly discuss any two major sources of risk in
agricultural occupation.
• Price uncertainty: The farmers face a price band
rather than a single market price for the product.
This makes subsistence agriculture extremely risky.
If the family is close to poverty line, low prices may
cause starvation.
• In addition to the price uncertainty, there is
weather uncertainty and technological uncertainty
33 34 7. A tenant farmer (paying the landlord a fixed
rent) or a sharecropper can make $2 per hour
in non-farm rural jobs. The graph, drawn
above, shows the market value of the
marginal product of labor, if they decide to
work on the farmland. How many hours will
each put in per week? 35 The tenant farmer will work 60 hours per week and
the sharecropper will work 30 hours per week.
8. Sharecropping is an inefficient agrarian system. Do
you agree with this view? Discuss.
In view of the previous question, sharecropping
seems apparently inefficient. But competition
among sharecroppers may reduce inefficiency. Also,
sharecropping results in risk-sharing and this may
make the sharecropping outcome socially efficient.
36 9. Would you advocate large scale farming as a solution of low
agricultural productivity in developing countries?
New agricultural technology and innovations can improve
productivity and raise output. Large scale farming, using
labor saving machinery can dramatically increase yield.
Problems: Large scale farming would cause unemployment of
farm workers and raise poverty.
Biological innovations (hybrid seeds and biotechnology), water
control (irrigation) and chemical innovations (fertilizer,
pesticides and insecticides) are scale-neutral. These work
equally well in small and large farms. Risk averse farmers
may resist these innovations. Scope for government’s role.
37 10. Write a brief note on integrated rural development. IRD involves the following:
(i) Efforts to raise both farm and non-farm rural incomes (in real terms)
through job creation, rural industrialization and other non-farm
opportunities and the increased provision of education, health, nutrition
and housing, and a variety of social and welfare services.
(ii) A decreasing inequality in the distribution of rural incomes and a lessening
of urban-rural imbalances in incomes and economic opportunities.
(iii) Successful attention to the need for environmental sustainability --- limiting
the extension of farmland into remaining forest, promoting conservation
and preventing harmful use of agrochemicals and other inputs.
(iv) The capacity of the rural sector to sustain and accelerate the pace of these
improvements over time.
38 Chapter 10: The Environment and Development 1. Briefly explain the following terms:
Sustainable Development, Global Warming,
Climate Change, Green Accounting,
Environmental Capital and Environmental
Kuznets Curve. 39 Global Warming: Increasing average air and
ocean temperature, attributed largely to
human industrial, forestry and agricultural
activities emitting greenhouse gases.
Climate Change: Non-transient altering of
underlying climate---- increased average
temperature, decreased annual precipitation
and greater average intensity of droughts and
storms.
40 Sustainable Development: A pattern of development that permits
future generation to live at least as well as the current generation,
involving at least a minimum environmental protection.
Environmental Accounting: The incorporation of environmental costs
and benefits in to the quantitative analysis of economic activities.
Environmental Capital: The portion of a country’s overall capital assets
directly relates to the environment-------forest, soil quality and ground
water.
Sustainable net national income (NNI*): An environmental accounting
measure of the total annual income that can be consumed without
diminishing the overall capital assets including environmental capital. 41 NNI* = GNI – Dm – Dn
GNI = Gross National Income
Dm = Depreciation of manufactured capital assets
Dn = Depreciation of environmental capital
NNI** = NNI* - R – A
R = Expenditure required to restore environmental capital
(forests, fisheries, etc.)
A= Expenditure required to avert destruction of
environmental capital ( air pollution, water and soil quality)
42 43 2. What are the four conditions of private property
markets?
a. Universality: all resources are privately owned.
b. Exclusivity or excludability: it must be possible to
prevent others from benefiting form a privately owned
resource.
c. Transferability: The owner of a resource may sell the
resource when desired.
d. Enforceability: The intended market distribution of the
benefits from resources must be enforceable.
44 3. How does private ownership of a resource protect its
environmental quality?
Under private property ownership, the owner of a
resource has the economic incentive to maximize the
net benefit from its sale or use.
The owner of land will choose the level of investment,
technology and output that maximize the net yield
from the land. The owner will also have the incentive
to maintain the environmental quality of land and to
avoid future degradation and loss of future incomes.
45 46 4. The graph, drawn above, shows the average
product of labor and the marginal product of
labor applied on a fixed resource, like land.
Explain why the resource is overused (Lc labor
units are applied on the resource), if it is a
common property but it is properly used (L*
labor units are applied on the resource), if it is
privately owned.
47 Private ownership of a scarce resource (such as land): The
owner will employ labor till the wage rate is equal to the
marginal product of labor. The level of employment will
be L*. The owner will get rent = Total production minus
total output going to L* number of workers.
If the land is a common property, each worker will be able
to appropriate the average product of labor and
employment will be at the level=Lc, where wage rate (in
this case, the opportunity cost of working on the common
land) = APL. From L* to Lc: Total production may actually
decrease, if MPL at Lc is negative.
48 5. Elinor Ostrom has laid down certain conditions for a fair and efficient
management of a common property. Mention any two of these conditions.
1. Clearly define boundaries: Define clearly the boundaries of a resource
(irrigation or fishery) assigned to individuals or households.
2. Proportional equivalence between benefits and costs: The right of an
individual or a household to use common resource should be proportionately
linked to cost he/she is willing to bear (labor, material or money input).
3. Collective Choice: The individuals included in this program of common
property should have the right to modify rules through collective choice.
4. Monitoring: Monitors should assess biophysical conditions. They are
accountable to the users.
5. Graduated Sanctions: Violators of rules should receive graduated sanctions
(severity of penalty depending on the seriousness of offence) from other
users or from officials.
49 6. Conflict Resolution Mechanism: Availability of local,
rapid and low-cost mechanism of conflict resolution.
7. At least minimal recognition of rights to organize:
Users have a long term tenure right to the resource
and they should have the right to devise their own
system.
8. Nested Enterprises: Appropriation, provision,
monitoring, enforcement, conflict resolution and
governance activities are to be organized in multiple
layers of nested enterprises.
50 51 6. The graph shows the demand curve for a product (D), marginal
private cost (MCp) curve and the marginal social cost curve
(MCs). The vertical gap between MCs and MCp is the society’s
evaluation of marginal damage caused by productive activity to
the environment and this gap is fixed at $4 per unit of output
produced. (i) Without the intervention of the government, how
many units are going to be produced and what is going to be
the market price? (ii) What should be the rate of a pollution
tax? (iii) How many units are going to be produced, if there is a
pollution tax and what is going to be price of the product? (iv)
How is the burden of the pollution tax going to be shared
between the consumers and the producers?
52 (i) 70 units will be produced and sold at $8 per
unit
(ii) Pollution tax = $4 per unit produced.
(iii) 50 units will be produced and sold at $10 per
unit.
(iv) Consumers will be $2 and the producers will
pay $2 of the pollution tax. 53 7. Mention any two policy options for the developing countries for dealing
with the environmental problems.
1. Proper Resource Pricing: Energy, water and agricultural subsidies
meant for the poor households are often captured by wealthy
household. Subsidized pricing of environmental resources for the
wealthy users should stop. Implementation may be difficult.
2. Community Involvement: Involvement of local communities in
environmental projects. Role of NGO (non-governmental organizations
in promoting environmental awareness. ‘Chipko’ movement in India.
3. Property Rights and Resource Ownership: Creation of property rights
for sharecroppers and landless workers who rent land from landlords
(land reform) so that they have incentives to maintain the
environmental quality of land
54 4. Provision of Economic Alternatives for the Poor: Government
should provide credit to low income farming families to
purchase land-augmenting inputs that improve the fertility of
land. This would prevent environmental degradation of soil.
Creation of alternative employment opportunities in the rural
economy: Programs to build infrastructure (roads, storage
facilities, marketing cooperatives) would alleviate population
pressure on ecologically sensitive land and reduce rural-urban
migration.
5. Raising the economic status of women: In their day-to-day
operations, women determine the pattern of resource use.
Environmental education of women would promote sustainable
management of water and fuel supply.
55 6. Industrial Emission Abatement Policy: Policies to limit
industrial pollution are: emission tax, tradable permits,
quotas and standards. The first two policies are market
based and are found to be more effective than the quotas
and standards, which are known as command-and- control
policies. In many developing countries, government is a
producer and often the government producer does not
self-regulate due to the lack of profit motive.
7. Protection against Climate Change and Environmental
Degradation: Early warning system, reforestation, storm
shelters, flood barriers, protected roads and bridges.
56 8. Briefly discuss how developed countries may help LDCs in their environmental
programs.
1. Trade Policies: Reduction of trade barriers against imports from LDCs. This has
the long term effect of raising incomes and reduction of poverty to limit
environmental damage.
2. Debt Servicing: Debt servicing or debt forgiveness would release funds for the
protection of the environment.
3. Debt-for-Nature Swaps: Private environmental organizations (U.S. based
Rainforest Alliance or Nature Conservancy) buy LDC’s foreign debt at at a
discount (like 30% of the face value) and exchanges this debt for the local
government bonds worth the full value of the original debt.

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