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Growth and Development : Solved
Questions
What are shadow prices? Why are these preferred over market prices in project evaluation? (2018) Answer : Shadow prices reflects opportunity cost of the resources used. It is used for project evaluation Reasons for preferring shadow prices over market prices
- Imperfect market Mechanism – Market may not be working efficiently. In such case market prices do not correctly reflect relative scarcities, benefits, and costs.
- Imperfect wage market – In developing countries there is disguised unemployment. In such situation labor market may not necessary reflects true opportunity cost of labor.
- Imperfect capital market – If unadjusted market price of capital is used in calculating the cost of capital on investment projects, it would underestimate the real cost of such projects.
- Inflationary pressure – Developing countries suffer from inflationary pressures because the market mechanism operates imperfectly due to a number of socio-economic and administrative obstacle. Thus actual market prices do not reflect social benefits and costs. Because of this imperfections market prices may not reflect actual value. Thus to ensure actual value of project shadow prices over the market prices. ©opyright : abhishekdudhal.wordpress.com
In Harrod’s model of growth, if the expected growth rate exceeds the warranted growth rate, what will be the relation between the actual growth rate and the expected growth rate? (2018) Answer : Harrod wanted to find out unique growth rate at which investment and income must grow such that full employment level is maintained for longer time. In Harrod’s model warranted growth rate is growth rate which induces enough investment to match planned saving. It is given by s/vr where s is MPS and vr is warranted capital output ratio. Actual growth rate is given by s/v where s is MPS and v is capital output ratio. At this growth rate saving = ex post investment. Sen introduced another growth rate ie expected growth rate. At this growth rate expectations of entrepreneurs are fulfilled. So if expected rate = warranted rate actual income is equal to the expected income. However if warranted growth rate < expected growth rate then the investor will invest more. It will lead to increase demand more than the capacity. Thus actual growth rate will be more than expected growth rate. Note : Question is based on Sen’s modification to Harrod model. If you want to read mathematical explanation read from
sY = K(∆K/K) + dK At steady stage ∆K/K = ∆Y/Y = n Thus sY = (n+d)K but Y/K = A Hence sA = (n + d) With AK model increase in capital increases income with constant proportion. Now if sA > n + d then k grows in perpetuity. Thus development of human capital may lead to constant returns and propel an economy to self-sustaining economic growth. ©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— Kuznets hypothesis predicts decline in income inequalities in the long-run. In recent decades do trends in income inequalities in development and developing economies support this hypothesis? Give reasons for your answer. (2018) Answer : Kuznets hypothesis analyzed effect of growth on distribution of income. According to Kuznet as income increases inequalities first increase and then decrease. Trend in in income inequalities in developing and developed economies
East Asian economies invalidated Kuznets hypothesis. There inequalities are decreasing with rising income. Increase in income was well distributed thus it reduced inequalities. It might be because of active government intervention for redistribution. In developed countries after fall in inequalities it started rising again. It might be because of growth in service sector. Service sector has high income generation capacity but low employment elasticity. Thus inequalities are increasing with growth of service sector. In countries like India and Brazil inequalities have not shown downward trend with growth. Inequalities kept rising with growth. It might be because of weak manufacturing sector and strong service sector. Another reason could be high income inequalities in initial phases. Thus India and Brazil might be taking time to go on downward path of Kuznet curve. ©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— Examine Arthur Lewis model of economic development with unlimited supplies of labour. What is A.K. Sen’s critique of that approach? (2018) Answer : Lewis model is dual sector model. It explains the growth of a developing economy in terms of a labor transition between the capitalist sector and the subsistence sector. Assumptions
marginal productivity of laborers which is zero over a wide range and not the marginal productivity of labor.
- Lewis said that withdrawal of a large portion of the agricultural population did not lead to a decline in agricultural output. This claim was repudiated by Sen who pointed out that as people leave agriculture those who remain may work harder.
- When economic growth takes place and workers are drawn out of the informal sector into the formal sector, those who remain in the informal sector each receive a higher income than before. ©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— Explain why the market and the State have complementary roles in economic development. (2018) Answer : Market and state are interdependent. Efficient working of both is necessary for development. Complementary role of state and market in economic development Enforcement of property rights and contracts The state protects private property rights and enforces contracts by passing and enforcing laws through such organi- sations as courts and police. Externalities
Under the externalities market may not be working at its efficient level. Thus government through subsidies and taxes can ensure efficient working of the economy. Ensuring Competition Through the unfair trade practices one player might establish monopoly. It reduces welfare of the society. Thus government has to regulate market. Market failure In Cob Web like situation market may fail to achieve equilibrium. In such situation government can help to achieve equilibrium. Resource Crunch Government may short of funds. Thus Public private partnership can fill the gap of funds. Also government might lack expertise in some area. It can be fulfilled by private players. Limitations of government Government might not be able to fulfill demand of all the citizens. Thus private player can come in picture to complement government. For example during corona private hospitals are also converted to the COVID wards. Thus rather seining market and state mutually exclusive they should be considered complementary for the economic development. ©opyright : abhishekdudhal.wordpress.com
Taxation Policy Government can impose tax on the sectors with negative environmental externalities. Lets say there are negative externalities. Free market equilibrium has output Q1 and price P1. Here private marginal cost (PMC) is equated with private marginal benefits (PMB). But is environmental externalities included then supply curve will shift upward. Because of negative externalities at Q1 social marginal cost is more than private marginal cost. Thus there is need to reduce output. It can be reduced by imposing tax. Subsidies to sector with positive environmental externalities Government can give subsidies to sector with positive externalities. It will reduce dependence on sector with negative externalities. For example government can give subsidies to solar power to reduce dependence on coal energy.
Free market equilibrium has output Q1 and price P1. Here private marginal cost (PMC) is equated with private marginal benefits (PMB). But, due to positive externalities social efficiency occurs at Q2 where social marginal benefits equates with social marginal cost. Society would benefit from increasing output until Q2. Thus government should give subsidies to such sectors. Regulation Government can regulate sectors with negative environmental externalities. For example India will compulsory have BS IV standard for automobiles produced after 1st April 2020. Pollution permits It is a carbon trading schemes where firms are given the right to pollute a certain amount. These permits can be traded with other firms Changing consumer behavior
©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— Show that Cobb-Douglas Production Function exhibits both Hicks and Harrod neutral technical progress. (2017) Answer : Cobb Douglas production function is given by Q = ALaKβ A technical change is said to be neutral if it is neither capital saving nor labour saving. Hicks neutral technical progress For neutral technical progress ratio of marginal productivity of capital to the marginal productivity of labor should remain same after technological change. MPK = bQ/K MPL = aQ/L
thus MPK/MPL = (b/a)(L/K) Thus Cobb Douglas production function shows neutral technical change. Harrod neutral technical progress Technical change is neutral if capital output ratio remain same. For CD production function MPK = bY/K Thus K/Y = b/MPK Thus technological change will affect value of A but won’t affect value of marginal productivity of capital. Thus Cobb Douglas production function shows neutral technical change. ©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— “In view of economic uncertainties, Hirschman approach to economic development makes more sense.” Discuss. (2017) Answer : According to balanced growth strategy there should be simultaneous development of different sectors of the economy so that all sectors grow in unison. According to it rise of demand for one good raises demand for other goods. However it is seen that nature of demand and supply is very uncertain. According to Hirschman balanced growth strategy is thus uneconomical. It also do not provide right signals. He said
The Paris accord, agreed in 2015, committed the US and other countries to keeping rising global temperatures below 2C above pre-industrial levels and attempting to limit them even more, to a 1.5C rise. It was an attempt for sustainable development. Through the Paris accord world could have achieved development with the conservation of environment. USA put development ahead of the environment. USA is largest economy. Its unwillingness to join Paris climate change may affect moral of other countries. Thus the trade off between environment and development could shift towards development. However other countries including European Union are committed to the Paris climate agreement. Also local and state governments from USA are also willing to keep commitments of Paris climate agreement. Developing countries like India are also enthusiastic for the agreement. India along with France formed International Solar alliance to promote clean energy. Thus USA exit from Paris climate agreement might lead to the unresolved trade off between development and environment. However remaining countries together could set it on right path. Note : Current affirms based question. Little possibility of repetation. ©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— Discuss the problem of intergenerational inequity arising out of internal public debt. (2017) Answer :
In the case of public debt, the benefits will extend into the future, so that burden transfer is called for as a matter of intergeneration equity. If benefit transferred is not equal to to debt transferred then it might raise issue of intergenerational inequity. According to benefits principles taxpayers in each time period should contribute to public expenditures from which they derive benefits in accordance with their share of those benefits. Thus according to conservatives burden of public debt would be on next generation. According to Ricardo public debt results in increased taxation in future. It also reduces saving in future. Thus next generation gets less reproductive capital. However if per capita incomes rise over time, then there is a case for present generations to shift some tax burden to future generations. Otherwise it would lead to problem of intergenerational inequities. Debt financed expenditure spreads burden across the generation. If that debt is for consumption of earlier generation then it is unnecessary burden on next generation. However if it is used for capital expenditure then it is going to benefit next generation as well. However benefit of public debt are not always tangible. For example, the cost of a war, fought successfully by one generation, should be shared by the next, because the latter generation shares in the benefits. Thus to reduce the problem of inter generational inequities there is need to have intergenerational Decision Making. It will help to ensure inter generational equities. ©opyright : abhishekdudhal.wordpress.com
Explain Kuznel’s inverted ‘U’ hypothesis. Is growth good for the poor? Explain. (2016) Answer : Kuznets inverted U hypothesis analyzed effect of growth on distribution of income. According to Kuznet as income increases inequalities first increase and then decrease. To explain this Kuznet used the time series data for individual countries and cross sectional data for regional inequalities. It was based on empirical analysis. Causes for increase in inequalities In the first part, industrial income rises and agricultural income falls. It also creates disparity between urban and rural area. It is because backwash effect is working for rural and agricultural sector. Causes for decreased inequalities Over the period spread effect starts working in rural area. It raises income in rural area. Also because of political pressure
government might take actions to reduce inequalities. It together helps in reducing inequalities. Growth and poor India’s experience suggest that poverty declined significantly with the growth. Poverty was 45% in 1991 in 2011 it reduced to 29%. Thus growth was beneficial for Indian poor. Growth has potential to reduce absolute poverty. However it might increase relative poverty. But ASEAN countries experience suggests that relative poverty can also decrease with growth. ©opyright : abhishekdudhal.wordpress.com ———————————————————————————————— ——————————————————— Under what conditions economic growth reduces employment growth? Discuss. (2016) Answer : Relation between growth and employment is complex. It is usually seen that growth increases employment. However growth can reduce employment growth. Following are reasons for it. Growth can be jobless growth. It can happen because growth is seen in employment inelastic sector while employment elastic sectors are not showing growth. India is facing this problem. There is growth in service sector which is employment inelastic. Growth can be capital led growth. In India manufacturing sector is capital intensive. It might be because of the complex labor regulations. It reduces employment capacity in the manufacturing sector.
