Development Economics at ICEF

Midterm exam
March 16, 2020

Part II: Problems.

Marking scheme
16. Calculate the maximal possible Gini coefficient under the following conditions:

Each of the points below are marked as follows:

20 points for correct solution with clear explanations. Reductions are as follows:
-5 points for numerical mistakes (depending on the severity of mistake)
- 10 points for the lack of explanations/unclear explanations
- 15 points for severe logical mistakes (e.g., people are not sorted in ascending order (i.e., Lorenz
curve changes from steeper to flatter segments), Gini coefficient of 1 is interpreted as minimal
inequality)
Further reductions are for individual cases (e.g., no aggregation of an example, etc)

Solutions to each of the points should yield:

a. (20 pts.) Median income equals average income.

G=0.75. Graphically, the solution should look as follows

 b. (20 pts.) Median income equals maximal income.

G=0.5. Graphically, the solution should look as follows

c. (20 pts.) Average income equals maximal income.

The only case is when all incomes are equal to maximal income. G=0. Graphically:

True, false, uncertain? Provide comments on any one of the following statements. (30 pts.)

17. There exists strong empirical evidence supporting the predictions of the Solow model.

Uncertain.
+ 10 points for outlining key predictions of the Solow growth model (golden rule of savings and
the resulting convergence)
+ 5 points for explaining the difference between absolute (worldwide) and conditional
(local/regional) convergence
+ 10 points for explaining the empirical evidence on the convergence (e.g., OECD countries vs
global economy)
+ 5 points for stating possible reasons for convergence prediction violation (e.g., empirical
relevance of the assumptions of the model such as CRS)
18. Brain drain is a negative phenomenon because it deprives the country of its most talented
people.

Uncertain.
+ 12 points for outlining negative aspects of migration (Early literature or Miyagiwa’s Brain-
drain model. No formal model required but the explanation of Miyagiwa’s model should include
explanation of agglomeration effect)
+ 5 points for outlining 4 key positive aspects of migration (remittances, return migration,
diasporas & incentive effects)
+ 13 points for explaining the details of at least 3 (~4 points each) of the concepts/theories on
positive aspects of migration discussed in class (e.g., motivation/Empiricus on remmitances,
positive aspects of return migration, effects of diasporas on international trade (specific goods) &
innovations, Stark & Wang model of incentive effects & Chand & Clemens support of it on Fiji-
New Zealand migration)
Essays – provide a detailed answer to any one of the following questions. (40 pts.)

19. In the context of Kremer’s “Population growth and technological change” theory, assume
there are two isolated territories with size of 10 million and 1 million square km,
respectively. The initial population density in both territories is 1 person per square km.
Which additional parameters are needed to estimate the difference in population growth
rates in these territories? What is the economic meaning of these parameters?

This essay would be better addressed with the re-statement of the main results of the model.
5 points for anything related to Kremer’s “Population growth and technological change” model.
+10 points for stating the core idea of the model (connection between the innovations, population
density and growth rates)
+7 points for stating that two key missing parameters are alpha (sensitivity of the production
function to input [innovators]) and g (research productivity per person) showing the necessary
steps for derivation or explaining the intuition why the data given in the task is not enough
+8 points for explaining the meaning of the parameters (provided above in the parentheses)

20. The main result of the Persson-Tabellini model rests on the assumption that the median
voter has income below average. Does it have to be the case? If yes, prove this statement. If
no, provide a counterexample. Illustrate your arguments on a Lorenz curve.

The proof of this statements begins with a contradiction, i.e., you needed to assume the
distribution where the median voter has income above average. Answer should be presented in
an essay-like form.
5 points for anything related to Persson-Tabellini model.
+10 points for stating the core idea of Persson-Tabellini (inequality harms growth)
+10 points for providing relevant example with median larger than the mean (e.g., (0, 100, 100))
and explaining the example with arguments.
+5 points for explaining that although such distribution is possible in theory, it is hardly
empirically relevant because in the majority of countries poor outnumber rich
+10 points for illustrating the argument on the Lorenz curve. You need to either provide the
illustration of your case or illustrate the Lorenz curve in general and link it to your arguments
(illustrate the Lorenz curve when mean is smaller than median).