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· Specific national currencies, shared currency with other countries, countries that use foreign currency
· Flexible, fixed, dollarized
Tradable (T) and non-tradable (NT) goods
· T: good with domestic price determined by e and its international price as an export or import substitute
· NT: good with domestic price determined by equality between supply and demand on the domestic market (ex=construction and services)
· (LCU)/(foreign currency unit)
· larger the number the more depreciated the other currency
External (empirical) and internal (theoretical) definition of the real exchange rate
· price index of internationally tradable domestic goods defined with reference to some domestice reference value
· internal: Pt/Pnt
· external: e (WPI$/CPIlcu)
Appreciation (re-valuation) and depreciation (devaluation) of the RER with a floating (fixed) exchange rate
· RER decreases=appreciates
· RER increases=depreciates
Identify the main determinants of supply of and of demand for foreign exchange that affect a floating nominal exchange rate
· Supply: export earnings, FDI, foreign portfolio investment, remittances from migrants, foreign aid, new debt
· Demand: imports, profit repatriation by foreign firms, debt service, debt repayment, capital outflight
· Floating exchange rate can be managed by the central bank through the management of foreign currency reserves
How does an appreciation of the real exchange rate influence the real side of the economy: production of T and NT goods, consumption of T and NT goods, use of T and NT inputs, exports, imports, and the balance of trade?
Production T: down
Production NT: up
Consump T: up
Consump NT: down
Import demand falls, demand for foreign currency falls, lowers e, appreciates RER
Makes ag and other tradable goods more expensive, this causes a disincentive to invest in agriculture
-export boom causes supply of dollars to shift, causing economy to appreciate, but when the boom ends other sectors (like ag) have been depleted
-to prevent: re-invest dollar earning, invest abroad, require that a % of FDI be held in central bank (tobin tax), increase productivity of tradable sector, avoid short term booms
What can the Central Bank do when there is a speculative attack on the domestic currency? Why do we talk about a devaluation vs. recession dilemma when using the
interest rate to counteract a speculative attack?
If traders think that a currency is not credible in its intention then they can start buying dollars
Central bank can sell its dollar reserves to meet the demand
Increase domestic interest rate to attract foreign capital
· Increasing interest rates will decrease investment and possible cause a recession, devaluation discourages FDI as it undermines confidence in the stability of the domestic currency
Why does China keep its RER depreciated, and how does it do it? Why is it an issue for the United States? What would happen to domestic consumption in China if the RER were allowed to appreciate? Why is this called a “neo-mercantilist” growth strategy?
Depreciates to help its export sector. Issue for the US because it causes a trade deficit. Domestic consumption would go up if currency appreciated
called the “Dutch Disease” exchange rate appreciates because of export
1. Define the total fertility rate (TFR).
Number of children that will be born to a woman during her reproductive ages (15 to 50)
One time population explosion that occurs as death rates fall ahead of birth rates..comes to an end when birth rates decline..countries had access to medicine and vaccines but were still having lots of babies
When there are more working class citizens than old/young ones. High savings/high growth in Taiwan and South Korea
insurance—risk that children will die is part of eqn
Longer life expectancy for parents means larger need for children but as social service programs improve less need for c
What are the relative roles of the supply of contraception and the demand for children in determining observed total fertility rates?
Demand for children shifted down as supply of contraception goes up
As income goes up, qd for children goes down…not inferior goods because there is a price effect—as income goes up parents want more costly children (health, education, material goods) thus children are actual normal goods
How would you establish whether population growth is excessive or insufficient?
Excessive when private benefits > social benefits…population growth reduces per capita growth of GDP, large surpluses of rural labor, high dependency ratios=low saving rate, difficult to reach public goods
If population growth is judged excessive, what can be done to reduce it? Distinguish between supply-side and demand-side interventions.
Supply: increasing supply and reducing price of contraception (bangaladesh did this successfully)
Demand: decrease poverty because rising income decrease demand for income and security functions of children, increase effective cost of children through offering higher education, through better healthcare parents needs fewer children, increase female education and workforce becusae then higher opportunity cost of having children
Open unemp: people actively seeking work—often times much smaller than it should be
Underemployment: when ppl do not work full time bc of seasonal unemp, when ppl work in low productivity jobs relative to skills and effort level
When wages are higher than equilibrium in formal sector, excess labor moves to informal sector where supply shifts out and wages are low
Migration continues to occur even though there is high urban unemployment
Wa=1 and Wm=4, P=1/4, migration continue until there is a 75% urban unemp. Rate
Stop migrating when P(Wm)=Wa (P=urban unemployment/total urban labor force)
Do not want to create more jobs because this will incentivize more people to move to urban sector even if there are not enough jobs for everyone
Ruralàurban migration makes sense even in the context of high unemp because of higher expected income
Policy implications: raise wages in ag sector—rural development programs, land reform, better technology and institutions
How does the “new economics of migration” analyze the decision to migrate? According to this approach, what are the main reasons for a household to send a migrant? Clearly identify the role of market failures in credit and insurance. How do policy implications to reduce migration under this theory differ from those of the Todaro model?
Migrating helps to mitigate various market failures at home…more local market failures induce more migration
Use remittances gives credit to household, also can act as insurance and allow for more risk-taking behavior
Repayment—part of trade for migrating/for rearing, feeding and educating
Inheritance—remit. Motivated by securing a share of future inheritance from parents…siblings can compete to send parents more
Social security—send to support old parents esp if there are no social security programs in place
Insurance motive—send migrant who can remit when adversity strikes at home
Altruism—selfless concern for the welfare of others
gains—increased return to education, reverse brain drain (silicon valley à bengalore)
losses—increase in local inequality (some get reimittances/some don’t), land abandonment, loss of traditional values
Yang: used impact of 1997 asian financial crisis on Philippines: ppl send more remittances when LCU is depreciated, consumption did not increase but investment in education and investment in entrepreneurial activities increased
Adverse selection (AS) in choosing borrowers: lender has difficulty in screening ex-ante good from bad borrowers due to incomplete and asymmetrical information
Monitoring of project choice and implementation to prevent moral hazard (MH): MH occurs when lender cannot observe or cannot enforce the proper use of funds and repayment by the borrower…cannot be certain that borrower is making good use of loan
Providing insurance in spite of the risk of MH: poor borrowers need some form of insurance against unexpected shocks otherwise loans for good projects will not be repaid in bad years
Enforcement in repayment to avoid MH (strategic default): lender cannot easily force borrower to repay
Access to credit is restricted to those with collateral
Efficiency cost: allocation of credit is unrelated to the marginal productivity of capital
Moneylenders: Why are they able to extend loans to the poor where the formal sector fails? Explain why interest rates charged by moneylenders are so high.
Defeat AS and MH in selection and monitoring because they know their clients, have access to local social capital so they can ostracize those who do not repay
Interest rates are so high because they need to have high liquidity positions—have to be able to give out a loan at any given moment (ie child goes to hospital in middle of night and need $$)
Can’t deal with covariate shocks (that affect all members of the community) because don’t have enough cash to fund everyone
Rotating saving and credit associations
Each meeting all make equal deposit (d), one member takes home lump sum (Nd)
Defeats selection and enforcement problems—usually tied by some sort of social capital, moral hazard for those who get the money early on and have little incentive to keep paying into the group
MFI institutions ask borrowers to self-select into groups of 5-30 members, each member responsible for paying loans of those who default “social collateral”
Frequent installments are required
Self selection solves AS problem
Joint liability helps in monitoring and payment…risk is diversified in large groups providing insurance for those with a true involuntary failure
What is meant by “dynamic incentives” and why is this instrument weakened by rising competition among microfinance lenders? Why are credit bureaus useful when this happens?
Dynamic incentives: make small loans (inferior to the size requested) with a steep increase in loan size overtime to reward good performance and loss of access to credit otherwise…if there’s competition individuals may just choose to go elsewhere
CREDIT BUREAUS: allow for information sharing about clients when dynamic incentives are weakened due to increased competition
Composed of 10-20 local women, make regular savings contributions over a few months until there is enough capital accumulated in the group’s bank account to begin lending—can lend this money out and collect interest or draw out of it themselves or use the SHG fund as collateral for a real loan
Under-save due to procrastination…need a commitment device to make people save. Send SMS message encouraging people to save, have deposit collectors go door-to-door, offer default option to avoid postponing payments, limit liquidity of saving so not motivated to withdraw savings
How do internet-based microfinance lending institutions such as Kiva and myc4
Lenders do not collect interest (kiva) myc4 collect small amount of interest
MH addressed by close monitoring of recipient
1. Give a typology of social programs to reduce chronic poverty and to reduce vulnerability to poverty. Which are contributory and non-contributory? What do we mean by a twin-track approach?
1. Asset creation or asset protection/replacement (more contributory)
2. Improvement of the context where the assets are used (more non-contributory)
3. Transfers to improve income, reduce vulnerability, protect income, or protect assets (example of twin track: reduces immediate poverty and enhances future income generation)
1. Give examples of social assistance programs using income opportunities for the poor versus using transfers to the poor.
Input subsidies for fertilizer and seed in Malawi, community driven development for local public goods in Zambia and Sierra Leone
1. In targeting, what are errors of exclusion (Type I) and of inclusion (Type II)? Why should we be concerned with each of these errors? Use a graph to show your answers.
Exclusion (I): excluded poor will bear the cost of not benefiting from the program of which she is deserving…descrease type I by raising z
Inclusion (II): drains a programs budget as resources are being wasted on non-deserving individuals
1. If we do not know people’s income levels (cannot use a means tests), and want to target program interventions on the poor, what options do we have? Explain how proxy-means tests work. Illustrate this by explaining how this is done by Progresa/Oportunidades.
Proxy means tests, community-based targeting, targeting on a conditionality, geographical targeting, demographic targeting, self-targeting
Proxy means: identify a small number of characteristics (Xi) for individual or hh that ar strongly associated with y, easy to observe, verifiable by others, cannot be easily manipulated…prediction of y will be accurate if there exist some X’s with a very strong correlation to y…better at identifying chronically than transitory poor
For oportunidades, had people apply for the program (important that all possible recipients apply) in urban sector or run census that looks at given variables, had seven correlates of poverty
1. Explain how a workfare program can be designed to achieve self-targeting. Explain the three constraints that it must satisfy: incentive compatibility constraint, participation constraint, and poverty elimination constraint.
Want to find a wage that is attractive to poor but not to non-poor
Incentive compatibility: wL<w<wH
Participation constraint: income with workfare>income without workfare
Poverty elimination constraint: participation in program takes poor out of poverty
1. Is it true that self-targeting always has a cost on beneficiaries? Why would this be? Give several examples of self-targeting and the associated costs.
Cost: participants have to reveal that they’re poor…net benefit is usually diminished by this cost
Ex=food stamps—stigma with participating
1. Since the poor often know each other, while the social welfare agency does not know them, how could this be used to target program interventions? What are the potential advantages and risks of community targeting? Give a couple of examples.
Advantages: communities have the power to decide which projects to invest in
Risk: favors communities with greater capacity in formulating projects and in making direct contributions, political biases might favor regions with greater political clout
1. Explain the concepts of infra- and extra-marginal transfers in kind. Why is an infra-marginal transfer identical to a cash transfer? Use a graph to show your answers.
Infra-marginal: like a cash transfer—moves out the budget constraint, but individual can subsitute food for other goods, thus moving them to a higher utility curve
Extra-marginal: moves out the budget constraint but a person can only eat so much excess food
1. Externality problem: Define the concept of a negative externality. Does this lead to over or under-production of the polluting good relative to the social optimum? Explain why (show on a graph)?
Negative extern: production decision of an individuals imposes a cost upon others, (MSC>MPC>MEC)
What are the different policy instruments that can be used to solve the externality problem? When can we use a tax versus a subsidy? Between taxes and quotas, which is preferred by the government and which by industry?
1. if the polluter does not have the right to produce the externality he can be subjected to a tax that will eliminate the overproduction of the polluting good
2. if polluter has the right to pollute has to be given a subsidy to reduce production to socially optimal level
3. output or pollution quota—higher PS than tax because producer captures the rent from regulation through higher prices
4. “cap and trade”: regulator sets the total output/pollution level and then allocates permits to each firm…if MB<price pollution then firm should sell its ability to pollute to other firms
Why is a cap-and-trade approach efficient, but why is it difficult to implement? Explain how this is an application of the separablity theorem.
Efficient because if MB pollution<price pollution, then firm can sell its ability to pollute to other firms that need it and make $$
Difficulty: regulator needs to keep track of who owns how many permits and ensure that they do not pollute more than that…new firms have to buy permits where as old firms were distributed permits
Application of separability theorem because if markets were perfect it wouldn’t matter who owned what
What is the main difficulty in extending the Kyoto agreement to all counties, including developing countries? Why is this, in the end, an equity rather than an efficiency problem?
Argument on who needs to pollute more—some argue that countries like India and China deserve more permits because they produce more. Developing countries say they don’t have the $$ to invest in clean tech and must have more permits
1. What are the conditions for the Coase theorem to apply? Why can we say that the outcome is efficient but not necessarily equitable (another application of the separability theorem)?
Coase theorem: sets up private parties so that they can negotiate a system of transfers to reduce pollution to its optimum level.
Polluter has MB and pollutee has MC each have full information about the other. Property rights are clearly allocated between the two parties and one party can sell their property rights to another for a fee—low or no transactions costs in bargaining process…who captures NSG depends on who has property rights
Polluter has rights to pollute (pollutee pays polluter)
Pollutee has rights to clean air (polluter pays pollutee)
Solution is equally socially efficient whatever the initial allocation of property rights. Who benefits from the bargain depends on who has the property rights—efficiency is not affected by the allocation of property rights, but welfare is.
Payment for environmental services (PES, REDD): How can they be justified? How can the magnitude of the payment be established? Why can they be win-win for the resource owner and for society?
Missing market for environmental services (ie cutting down a tree and carbon capture)
Not a subsidy—it’s a correction for a market failure that creates a NSG
Price has to be established as a willingness to pay
Rival: fish/lumber disappear with appropriation by one member
Excludable: non-members are excluded while members cannot be excluded
· Private: Rival, Individually excludable
· CPR: Rival, collectively excludable
· Open access: Rival, non-excludable
· Club: Non-rival, excludable (ex=swimming pool)
· Public: non-rival, non-excludable
CPR is an incomplete property right because it is communally (not individually) excludable
Tend to extract beyond the social optimum because there is still a profit to be had…each member imposes on others a negative externality in extracting the resource that he does no take into account
“tragedy of the commons” because property rights are not assigned cooperation is impossible, each user wants to extract as much as fast as possible to the point where AR=AC and profit=0. Players look at what would happen if their opponent defaulted or agreed and they benefit each time more from defaulting thus causing them to default
Management of CPRs: Why can there be ground for optimism even when there is no formal cooperation? Explain and solve the Chicken Game and the Assurance Game.Explain the Folk Theorem and the Tit-for-Tat strategy
Chicken Game: one person defaults and one doesn’t…applies well to situations where vital tasks could be done cooperatively but can also just be done by one person (2 and 3)
Repeated PD: cooperation over long period of time with undetermined end date
Folk Theorem: players cooperate if PV of future gains > immediate gains from defaulting
Tit-for-Tat: default is costly, thus both cooperate repeatedly
Puts a cost onto defaulting that causes individuals to cooperate…have to have an authority figure that enforces the fines
1: prop rights are necessary to be able to restrict entry and extraction by others, failure to have prop. Rights makes it an open access resource
2: payoff from cooperation has to be higher than default, triggers to encourage cooperation (ex of natural disasters), number of members (smaller groups tend to be more efficient), must have right to collective action
3: smaller groups and peer monitoring, group homogeneity, physical ease of monitoring, decentralization
4: individual enforcement (have to apply sanctions, make exit expensive, share social norms), commitment devices, conflict resolution mechanisms, need to have a punisher
5: cooperation takes time to learn and establish—cooperation can be habit forming
Gross enrollment rate: # children enrolled at given level/# children that respond to that given level by age…GER>100 is not a good sign—shows that people are being held back
Net enrollement rate: # children in revelant age group enrolled in given level/# of children in that age group…always <100
i=intrinsic value of school—depends on parents education, childs ability, childrens identification with others at school
w1-w0= future gain in income on labor market…depends on previous ownership of assets
6= future incomes are valued less than current incomes—discount rate, higher for poor
c=cost of education
w0=opportunity cost of schooling
W0 represents the opportunity cost of schooling and thus represents the amount of income that will be forgone if the child were to go to school—because of this w0 is considered to be part of the cost side of eduation
Higher the discount rate, the lower the discount factor and the lower the present value of future income (discount rate can be thought of as interest rate)
IRR: interest rate that equates the net present value of benefits to the net present value of costs…if IRR<r then individual will decide to undertake a project
Poor have high discount rate because 1. Capital markets fail for poor due to lack of collateral and higher capital costs. 2. Present consumption might be vital for survival. 3. Parents are decision makers and have shorter time horizons than children
In the 1970’s Indonesia built one primary school for every 500 students. The government made an assertive effort to place more schools in poorer neighborhoods. Thus these poorer neighborhoods were considered “high-intensity” and the richer neighborhoods (that weren’t given as many new schools) were considered “low-intensity”. Did a diff-in-diff looking at years of educational attainment between high and low intensity schools. Change in years of education was greater in the high intensity area.
Short-term: healthier children, family has access to credit
Long-term: educational attainment allows for higher future income, education has a positive externality, more likely to educate their children in the future
Unconditional cash transfers need to be “framed” correctly so that they can achieve specified outcome
Imposing conditionality has been considered more effective to achieve the educational objective of the transfer than leaving transfer unconditional this is because:
-poor parents might not be fully informed about the benefits of education for their children in part because they are not educated themselves, return to ed in ag communities is very low
-parents may not decide optimally for children because of higher discount rate
-parents underinvest in education because there are positive externalities that they do not internalize
1. What are the different contributions that agriculture makes to economic growth?
· Reduces cost of feeding industrial labor, creation/taxation of capital, ag exports as source of FX reserves, ag. Production demand creates market for intermediate goods
1. What is the theory of “induced technological innovations”, and how does it predict that innovations are biased to respond to relative factor scarcity? Define labor-saving and land-saving technological change. Why was technological change in agriculture labor-saving in the US and land-saving in Japan?
· Bias of innovations in ag. (land or labor saving) is thus induced by the price signals that guide the allocation of research priorities
· Labor saving: (w/pA goes up) price of labor rises relative to price of land, innovation in mechanization and labor saving chemicals, labor productivity will rise (q/L)… done in US because land is plentiful
· Land-saving: (w/pA goes down), price of land rises relative to price of labor, innovations focus on tech change in seeds, farming systems, chemicals, and water management, land productivity (q/A) will go up
q = t f [fL (L, tLKL), fA (A, tA KA)]
FL=Labor saving, FA=land saving
1. There is concern that available technologies are under-adopted in Africa. What are the 5 main constraints to adoption that have been proposed?
Profitability: difficult to measure profit of new tech. in conditions with multiple market failures
Information: social learning is important (need to work in network)
Credit/insurance market failures
Lack of Complementary Assets: secure land tenure is necessary for long term investment
1. Information is important for adoption. What is meant by learning-by-doing and learning-from-others. What does it suggest for the role of social networks in helping farmers decide to adopt a new technology?
Learning-by-doing is self adoption and teaching yourself. Learning-from-others means that you work within your social network to learn how (and if) a given technology works…thus if a new tech works especially well for a certain farmer he is more likely to tell his friends about it and more are likely to adopt
1. Define diffusion versus adoption. What did the diffusion of hybrid corn in the United States teach us about how diffusion occurs?
Diffusion is the aggregate outcome of adoption decisions. Driven by supply and demand to adopt
Supplied hybrid seeds to states that produce the largest amount of corn (and thus with the largest potential effective demand) to make diffusion as large as possible
1. Explain how are the benefits from technological change differentially appropriated by producers and consumers depending on whether the commodity is tradable or non-tradable? When demand is inelastic, why are farmers in a “technological treadmill”? When demand is elastic, is there a technological treadmill?
Non-tradable: demand is inelastic rise in consumer surplus because production becomes cheaper and cannot export the service—tech treadmill because of falling average costs and falling avg prices
Tradable: demand is elastic, can export additional q, rise in producer surplus—tech treadmill because gain in PS, increases land values…as technology diffuses across farmers, average costs fall and land prices rise which pushes farmers to look for new technological innovations (TECH TREADMILL)
1. Define food security at the household level. What are the three conditions that need to be met to achieve food security?
DEF: when all people, at all times, have physical, social, and economic access to sufficient, safe, and nutritious food to meet their dietary needs and food preferences for an active an healthy life
Availability, access and use
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