Unit 1

- What is Economic Development?

R.E. Lucas - Economic Development focuses on the rates and levels of growth in the per capita income. He
gave a narrow definition.

P.P. Streeten - Treat human beings as the ends to improve their condition and enlarge people’s choices.
Establish a link between economic development and human development to achieve unity of interests.

Economic development focuses on raising incomes, well-being and economic capabilities of the population.
Different people have intuitive notions of development. A minimal requirement is that a high physical quality of
life is spread uniformly across the population. Material well-being is considered to be a basic prerequisite. When
assessing economic development, apart from PCI, we take into consideration removal of poverty,
undernutrition, life expectancy, access to sanitation, clean drinking water, reduction of infant mortality
and access to education.

It’s believed that the universal features of economic development like literacy, life expectancy and health go hand
in hand with the per capita income. Correlation between GNP and other indicators can be challenged. Apart from
PCI, distribution of income also plays a pivotal role in the development of nations.

- What are the Problems with Measurement of income?

A. Underreporting of Income B. Poor Exchange Rates C. Disparate Goods D. Imperfect Markets E. Government
Intervention F. Externalities

- Explain the process of calculating and using Penn World Tables.

1. Relative Price Calculation: It begins with gathering data on prices of 400-700 items in each of a set of
benchmark countries. Relative Price: The price of each item is divided by the corresponding price in the
US. This yields the relative price of goods. Expenditure Categories: All items are classified into 150
expenditure categories. The averaging procedure yields an average relative price.

2. Obtain National Currency Expenditure: Calculated for all the 150 categories. This is used to estimate
the quantities involved by dividing the expenditure by the relative price.

3. Yields PPP: It’s the ratio of its domestic currency expenditures to the international price value of its
output. PWT tables are not suitable for international financial transactions and capital flows.

- Explain the concept and functioning of a mobility matrix.

Mobility matrix gives evidence that low incomes tend to be very sticky. It was constructed by Quah in a paper
published in 1993. Following is the process of constructing a mobility matrix:

1. Obtaining Fractions: Per capita income of every nation can be divided by the world average to arrive at
different categories. For example, ¼, ½, 1, 2 and infinity. A category with label 2 consists of all the
countries which fall between 1 and 2.

2. Axes Creation: 2 axes are taken for 2 points in time. This gives a good sense of the mobility
showcased by different nations. Therefore, every cell defines a pair of categories. Sum of all elements in
a row must be equal to 100%.

3. Observations:

i. Diagonal: A matrix with high numbers on the main diagonal consisting of special cells with the same row and
column number indicates low mobility. It shows that there is a high probability of countries remaining in the same
category.
ii. Observation regarding Middle Income Countries: They have the highest probability of making progress.
Less than half of them remained in the same category. Less than half of the middle income nations changed their
position.

iii. Poverty Traps: Poorest and Richest Nations tend to retain the same position. Low income nations tend to
move downwards.

iv. Relative Distribution of Income: It tends to remain stable. The disparity continues to be staggering. The
average PCI of the richest 5% is 29 times the average PCI of the poorest 5%.

v. Variations in Growth: Rise of the East Asian Economies and Languishing of Sub Saharan Africa and Latin
America.

v. Low Income can be Advantageous: New technologies are available from the developed nations. There is a
high marginal product of capital. Benefits of hindsight are also available.

- What are the Faces of Underdevelopment apart from Low PCI?

1. Literacy 2. Health 3. Poor Infrastructure 4. Lack of Freedom and Agency 5. High Unemployment 6.
Dependence on Foreign Debt 7. Low Technological Advancement 8. Political Governance. Give the example of
Sri Lanka and Guatemala.

1. Use of Indices:

i. HDI consists of life expectancy, educational attainment and PCI. Educational attainment is broken down into
adult literacy (⅔) and enrollment rates (⅓). PCI is adjusted once the $5000 threshold is achieved. HDI creates a
final number between 0 and 1 which reflects the fraction of ultimate development. Explain the entire calculation of
HDI as given later on.

ii. Morris’ Physical Quality of Life Index: IMR, life expectancy (conditional to reaching 1) and literacy rates.
Composite indices are always preferred. They are simple and hold a ton of political power. One can observe a
strong correlation between PCI and human development.

- What is the Inverted U Hypothesis given by Kuznets?

As income levels increase, inequality first increases and then gradually decreases. This can be observed by
comparing the share in GNP of the richest 20% and the poorest 40% (Kuznets ratio).

Initial stretch of the inverted U depicts the situation in nations such as the Indian subcontinent, Africa and the
poor Latin American nations.

As we reach the $8000 PCI mark, we can observe a decline in the share of the richest in the national income.
This depicts the situation prevalent in the middle income nations such as other Latin American countries and fast
growing Asian economies.

The share in income of the rich begins to drop steeply around the $9000 mark which represents the situation in
Korea, Portugal, etc. This is followed by the rich economies consisting mainly of European and North American
nations and Asian powerhouses such as Singapore and Japan.

- What are the Structural Differences which can be observed between different Nations?

A.Demographic Characteristics B.Occupational and Production Structure C.Rapid Urban Rural Migration D.
International Trade

Unit 2

- What are some major Causes behind the difference between Developing and Developed
Nations?
A.Physical Capital B. Human Capital C. Technical Innovation D. Population Growth E. Total Factor Productivity
(TFP) F. Colonization Legacy G. Institutional Quality H. Corruption I. Infrastructure Deficit J. Trade Barriers and
Dependency K. Environmental Challenges L. Debt Dependency

- What are some Preliminary Observations about Economic Inequality?

A.Short Term or Long Term Considerations B. Sources of Income C. Judging the Final Outcome D. Relationship
between Inequality and other features of Economic Growth

- Explain the 4 Criteria which must be fulfilled for Inequality Measurement.

Let’s assume that ‘n’ is the number of individuals in a society. Income distribution describes how much income
‘y^i’ is earned by an individual.

A. Anonymity Principle: It doesn't matter who is earning the income. Example: Let there be 2 individuals
who have switched job roles. Therefore, permutations don't matter. All that matters is the arrangement
from the poorest to the richest. Therefore, we can number people in the increasing order of income.

y^1 <= y^2 <= y^3 <= …… <= y^n

B. Population Principle: The size of the population is irrelevant. For example, cloning shouldn't matter.
Therefore, ‘n’ and ‘2n’ won’t have an impact. Only the proportion of the population earning different
levels of income matters. Everything can be normalised to percentages with the use of income classes.
Income classes can be shown on the horizontal axis (X) and the respective %age of the population can
be shown on the vertical axis (Y).

C. Relative Income Principle: Only relative incomes matter, absolute numbers are irrelevant. Therefore,
scaling up or down will have no impact on the income levels. Absolute incomes are an important
indicator of development, not of inequality. Therefore, both population and income can be expressed as
shares of total. This allows comparison between the income distribution of 2 nations with high disparities
in average income levels. We can use quintiles in order to measure the degree of inequality.

D. Dalton Principle: Founded in 1920, it is critical to the construction of the measures of inequality. Let
there be y^i <= y^j. A regressive transfer is made from j to i. A sequence of regressive transfers can be
carried out. In this case, the new distribution will be more unequal compared to the old distribution.

Let there be an income distribution which is assigned an inequality degree ‘I’. Therefore,

I = I(y1, y2, …. , y^n)

It fulfills the anonymity principle as it’s completely independent of the permutations. It fulfills the population
principle because:

I(y1, y2, …. , y^n) = I(y1, y2, …. , y^n ; y1, y2, …. , y^n)

The relative income principle can be incorporated by considering the following:

I(y1, y2, …. , y^n) = I(Xy1, Xy2, …. , Xy^n)

The relative income principle can be incorporated by considering the following:

I(y1, y2, …. , y^n) < I(y1, y2 - S, …. ,yj + S, y^n)

- Explain the Functioning of a Lorenz Curve.

It’s a diagrammatic way of measuring inequality in a nation. Following is the process:

 1. Population is sorted in an increasing order of income: The horizontal axis shows the cumulative
percentages of the population arranged in an increasing order of income. Vertical axis shows the
percentage of national income accruing to a specific percentage of the population.

2. Lorenz Curve begins and ends with the 45 degree line: If everyone had the same income, the
Lorenz Curve would coincide with the 45 degree line. As the inequality level increases, the curve starts
to fall below the diagonal in a loop that is bowed out towards the right. Since it goes from the poor to the
rich on the X axis, The marginal contribution of the population can never decline. Hence, the Lorenz
curve can never get flatter.

3. Lorenz Criterion: If the Lorenz Curve of one distribution lies towards the right of the other Lorenz
Curve, the former should be judged to be more unequal than the latter.

- An Inequality Measure consistent with the first 4 Principles is also consistent with the Lorenz
Criterion. Explain the given Statement.

A. Lorenz incorporates information of the first 3 principles because it ignores magnitudes and focuses on
population shares.

B. Conduct a Hypothetical Regressive Transfer: As a result, the share of the lower percentile starts
falling. Hence, the new Lorenz Curve starts dipping. Reduction happens because of the variables on the
respective axis. Finally, the share in the cumulative income returns to the normal level. Hence, it holds
true to the Dalton Principle. Therefore, it must be possible to construct a set of disequalizing transfers
when a Lorenz curve is given.

C. When 2 Curves Cross: The Lorenz Criterion doesn't apply. Dalton regressive transfers won't hold true.
Neither of the Lorenz curves lies uniformly to the right. Therefore, the first 4 principles will also not be
applicable. In such a situation, we need both progressive and regressive transfers to arrive at the
second income distribution. Give 2 examples. One must compare the cost of a regressive transfer and
the benefit of a progressive transfer for policy making. However, these tradeoffs are difficult to quantify.

- What are the Quantitative Methods of measuring Inequality?

Let there be ‘m’ distinct incomes. The number of individuals in every income class ‘j’ is equal to ‘n’. The mean is
simply the average income.

Mean = (n^j*y^j)/n

A. Range: Difference between poorest and richest divided by the mean to express independently. Fails to
satisfy the Dalton Principle.
Range = (1/Mean)*(y^m - y1)

B. Kuznets Ratio: Poorest 20/40% or the richest 10% of the population. It’s a piece of the Lorenz Criterion.
It gives the ratio of the richest x% to the poorest y%.

C. Mean Absolute Deviation: It takes advantage of the entire income distribution. Inequality is
proportional to the distance from the mean income. Therefore, the sum total of distances is divided by
the total income to express the average deviation. It is often insensitive to the Dalton Principle. For
instance, consider 2 income levels below and above the mean and apply a regressive transfer. It raises
inequality. This won't hold true if both the incomes are above/below the mean level.

D. Coefficient of Variation: It gives more weight to the larger deviations as it squares all the deviations
from the mean. Hence, the Dalton Principle holds true.

E. Gini Coefficient: Instead of considering deviations from the mean, It calculates the difference of all the
pairs of incomes and totals the absolute difference. It is further normalised by dividing by population
squared multiplied by the mean income. It is also divided by 2 because the difference is counted twice.
We can apply a regressive transfer and check. Find the difference of incomes towards the left and
 towards the right. We can observe that the distance of pairs between the 2 income levels has gone up.
Gini coefficient gives us the precise ratio of the area between the line and the curve and the triangle
lying below the 45 degree line.

G = (½*n^2*mean)*n^j*n^k*|y^j-y^k|

A Problem when 2 Lorenz Curves cross. CV and Gini coefficient can give conflicting results. Therefore, our
intuitive sense of inequality remains incomplete. First 2 indicators are crude but not useful. The 3rd indicator is
not recommended in any situation. 4th and 5th indicators fulfill all the 4 criteria discussed above.

- Differentiate between Capabilities Approach and other Approaches to Measure Poverty. (Income
based, Human Capital and Basic Needs)

1. Definition and Focus 2. Conceptual Foundation 3. Multidimensionality 4. Role of Freedom and Agency 5.
Addressing Inequality 6. Practical Implementation 7. Conversation Factors 8. Time Perspective 9. Policy
Implications 10. Cultural and Contextual Sensitivity 11. Measurement of Deprivation

- What are all the Conceptual Issues of Poverty?

1.Overall Expenditure or Item by Item Consumption Basket 2. Absolute or Relative Comparison C. Temporary or
Chronic D. Households or Individuals E. Why a Poverty Line?

- What are all the Measures of Poverty?

A. Headcount: Number of people below the poverty line. Measures absolute poverty.

HC = Number of people with y^i < p.

A. Headcount Ratio: Headcount relative to the total population. HCR = HC/n. It fails to capture the extent
of poverty. Headcount is insensitive to the poorer population. Policy is biased in favour of people lying
close to the poverty line.

B. Poverty Gap Ratio: Offsets the headcount bias. It's the ratio of average income needed to get all poor
people above the poverty line divided by the mean income. Division is important to know how large the
gap is relative to the resources required. It's actually a measure of the resources required for
eradication.

PGR = (p - y^i)/n*m

C. Income Gap Ratio: Dividing by economy wide income can be misleading in highly unequal societies.
IGR measures the exact shortfall and divides it by the total income required to bring all poor people out
of poverty. It's a more accurate depiction of the acuteness of poverty. However, PGR and IGR only
capture the per capita intensity. They all fail to identify the relative deprivation among the poor.

IGR = (p - y^i)/p*HC

D. Foster-Greer-Thorbecke Index

- What are the Empirical Observations of Poverty?

A.Demographic B. Urban and Rural Poverty C. Asset Ownership D. Nutrition

- Why is the Relationship between Low Income and Capability Deprivation variable in nature?

A.Demographics B. Coupling of Disadvantages between Income Deprivation and Conversion of Income into
Functionings C. Intra-family Distribution D. Relative Income Deprivation Yields Absolute Capability Deprivation

- What are the Dilemmas in Measurement of Inequality?

 A. Adam Smith’s Impartial Spectator: Inequalities are hard to defend with different models of fairness. It
requires an imaginative criteria which requires far reaching insights.

B. John Rawl’s Original Position: It's a hypothetical concept. People don't know their capabilities or their
true potential.

C. Unreasonable Rejection: Patent inequalities in social arrangements are difficult to justify in terms of
reasonableness, a criteria proposed by Thomas Scanlon. A sense of inequality is barbaric and it erodes
social cohesion.

D. Aggregative vs Distributive Considerations: Eg, Atkinson’s equally distributed equivalent income. It

adjusts the aggregate income by reducing its accounted value according to the extent of inequality in
income distribution.

E. Inequality in Different Spaces/Contexts: Eg, well being, freedom, health, etc. Aggregative
achievements can take different forms depending on how totalling is carried out. Example, income vs
political participation.

- Explain the calculation of HDI.

HDI is a summary measure of different achievements covering 3 dimensions: health (life expectancy), education
(expected years of schooling and mean years of schooling) and standard of living (GNI).

Life expectancy ranges from 20 to 85. Expected schooling ranges from 0 to 18 and mean years of schooling
ranges from 0 to 15. GNI ranges from $100 to $75000.

Dimension Index = (Actual - Minimum Value)/(Maximum - Minimum Value)

Since the conversion of capabilities into income is concave, we take the log of the values. Finally, the geometric
mean of the 3 variables gives us the HDI.

Unit 4

- As an Individual, what are the Steps you would take to contribute in making a Sustainable
Society in the Future.

A.Adopting a Sustainable Lifestyle B. Promoting Education and Awareness C. Supporting Sustainable

Consumption and Production D. Advocating for Policy Change E. Reducing Personal Ecological Footprint F.
Promoting Circular Economy Principles G. Fostering Intergenerational Equity

- How can Trade Expansion hurt the Environment?

A. Hidden Subsidy: Consider the example of timber concessions granted to private firms. Deforestation
leads to downstream floods and siltation. Law should compel them to compensate. However, there is a
wedge between the existence and enforcement of law. Therefore, one doesn't recognise the true cost of
logging borne by the poor. In other words, the poor are subsidizing the actions of the rich. However, it's
not possible to calculate the magnitude of these subsidies.

B. Discounting Climate Change: If current trends continue, carbon concentration will reach 500 ppm.
Rise in temperature leads to infrastructural destruction as capital assets are destroyed before their
obsolescence period. Speed of such an increase in temperature is of utmost importance. Other side
effects include changes in the disease environment, geographic distribution and productivity of
ecosystems. Despite this, discounting takes place at a positive rate.

It's reasonable to use a positive discounting rate because of 2 reasons: 1. Future benefit is of a lesser
value if the global community is impatient. 2. Considerations of justice and equality demand a smoothed
consumption per capita across generations. However, it's argued that the 1st point is invalid as it
 discriminates against the future generations. Furthermore, if the 2nd point is true, then a decline in
consumption should be discounted at a negative rate.

Economists assume that global consumption is bound to rise. However, climate change might imply
otherwise. The benefits of carbon sequestration are to be derived after 50-100 years. Models assume
that global consumption will grow.

Resources like the atmosphere is an open access resource. As long as this practice is in place, there
will be a wedge in the rates of discounting used by the climate community.

- Explain the Measurement of the Productive Base of a Country.

A. What all is Included: It's the stock of capital assets and institutions. Capital assets include
manufactured capital, human capital, knowledge, natural capital and externalities. Institutions must
compensate for the depreciation.

B. Why GDP is Insufficient: It doesn't provide for depreciation. Base can shrink despite a rise in the GDP.
Same is the case for HDI.

C. Shadow Prices: Consider an asset’s social productivity. It's the capitalised value of flow of services
provided by the asset (also referred to as the shadow price). The well being of future generations needs
to be included.

D. Calculation Methodology: Inclusive wealth is the stock of the capital assets. Inclusive implies that both
natural capital and externalities have been considered. Therefore, the productive base is equal to
inclusive wealth plus institutions.

i. Estimate the Inclusive Investment: Change in manufactured, human and natural capital.

ii. Estimate Change in Total Factor Productivity: Transform both the figures to calculate the impact.

iii. Combine both the figures and adjust for demographic changes (change in population).

Example: Net investment in human capital (education expenditure) plus manufactured capital (net national
savings) minus disinvestments in natural capital (stock of commercial forests, oil, minerals and quality of
atmosphere). Flawed because the World Bank's list of natural resources is incomplete. It doesn't consider health
for human capital. Shadow prices are highly approximated.

- Why can't we rely on Market Pricing Signals in the case of Natural Resources?

A.Missing Markets B. Large Temporal Distance C. Migratory Resources D. Unprotected Property Rights E.
Externalities F. Underpricing

Unit 5

- What is the Potential Upside of Globalisation?

A.Economic Integration B. Transfer of Knowledge C. Faster Diffusion of Ideas D. Gains from Trade E. Access to
Foreign Investment F. Improved Consumer Access

- What is the Potential Downside of Globalisation?

A.Bypass the Poor Population B. Vulnerable to Global Shocks C. Increasing Inequality D. Biased Institutions E.
Cultural Destruction F. Capital Stampeding: Leads to devastation in fragile economies.

- What Measures can be taken to make Globalization a fair Process?

A.Leveled International Agreements B. Political Corruption. C. Legalities D. Domestic Modernization E. Honest
Globalization

- What are the Current Issues with International Trade?

A. Dependence on Primary Exports B. Dependence on Service Exports C. Importation of Raw Materials and
Capital Goods

- Examine the Impact of Globalization on the Poor as Workers and as Consumers of Common
Property Resources.

A. Poor as Self Employed: They are artisans or petty entrepreneurs. They face major constraints in
storage, marketing, insurance, etc. Globalisation actually helps in removal of these bottlenecks.
They require policies to be protected from large agribusinesses and manufacturing firms.

Small producers involved in trade benefit from globalization. They lose from country protectionism
and subsidization.

Small farmers suffer due to non tariff barriers under a host of sanitary and safety regulations. This is
where rich global companies spending on marketing play an important role. Companies need time
and resources to establish reputation and loyalty. Global multinational companies play an imperative
role by paying high marketing margins. Developing countries need to coordinate policies and build
more credible international quality certifications. If the marketing expenses are too high, the
government should intervene with antitrust initiatives.

B. Poor as Wage Labourers: It's hard to disentangle the effects of globalisation on wages. Traditional
theory suggests that wage labourers have a comparative advantage in products intensive in unskilled
labour. Example, Bangladesh. Developing nations often import labour intensive commodities so that
trade can lead to lower wages which further complicates the matters.

There is little evidence that MNCs exploit workers with low bargaining power. Contrary to the
campaign against the sweatshops, wage labourers are dependent on these shops for more
meaningful employment compared to the available alternatives. Therefore, hindering their entry can be
counter productive. This might not be the case if MNCs outsource services to reduce their overhead
costs.

3 reasons why opening the economy might worsen the condition of the wage workers:

i. Mobility Issues: Retool and relocation is difficult and depends on availability of credit, information,
networks, etc.

ii. Nature of Technical Change: It is biased against unskilled labour. Example, using labour saving
technology.

iii. Collective Bargaining: It leads to weakening of unions. Foreign competition lowers profit margins
leading to revision of agreements. There is always the threat of substitution by foreign factors of
production.

Despite this, Globalization should be welcomed as long as domestic rulers can provide a credible commitment
and proper social protection. International organisations should be responsible for funding education and training
programs along with better income support measures.

In such a situation, institutions play a key role due to the following reasons:

i. Mass Politics: If the nation state is the primary forum for demanding redistributive and insurance functions,
then it's a matter of serious concern. Better conflict management is essential. For example, Scandinavian
nations.
ii. Loss of National Policy Options: International organisations need to be held accountable less to the
developed and rich nations and more to the developing world. More transparent decision making is required in
such institutions.

iii. Loss in Bilateral Negotiations: Requesting the abolition of WTO isn't a suitable measure as it will lead to
more exploration. Developed nations are bound to be stronger and more arbitrary in bilateral negotiations.

iv. Capital Taxation: One should not exaggerate its effects. Presently, countries only generate a small portion of
revenue from taxing capital. Instead, there are arguments for other redistributive policies such as VAT rather than
taxing capital. However, governments should not become dependent on custom duties as their major source of
revenue.

C. Poor as Users of Public Services: Developing nations don't offer much social protection to the poor.
However, they offer public services like education, health, etc.

Globalization compels governments to cut budgets to make up for fiscal stabilization and meet IMF
standards. However, a primary reason behind fiscal imbalance is not Globalization but poor domestic
policymaking. Example, subsidies for the rich, bloated public sector salaries, etc. The government's first
response is to cut expenditure on the poor to retain the clout gained from the rich population.

Often, money doesn't reach the poor due to administrative bottlenecks and corruption which is again a
part of domestic institutional failure.

D. Poor as Users of Common Property Resources: These are not covered by the standard poverty
surveys and private consumer expenditure estimates. Trade liberalisation leads to over exploitation of
natural resources which bears hidden costs on the poor people.

The actual costs are not only dependent on Globalization but also on the methods of production and the
crop pattern. For example, if an economy which specialises in land intensive production implements
import substitution, it will lead to more land under cultivation and depletion of resources. Trade
liberalisation will prevent this phenomenon and will improve the quality of the biomass available.

The situation given above is avoidable if there are stringent property laws which are enforced properly.
However, this would involve a large amount of time and a whole new framework. Instead, better short
term measures can be taken such as correction of administered underpricing of natural resources.
Therefore, one should blame domestic vested interests and not Globalisation for the problems
mentioned above.

International coordination is also required to ensure there is no undercutting in case of resource

intensive exports. As these goods are less elastic, increase in prices won't lead to a fall in revenue.

The argument of pollution havens doesn't hold any credibility and isn't backed by any evidence. On the
contrary, foreign producers often use more energy efficiency methods of production.

Self Employed: Artisans, Small Producers, Farmers, MNCs with High Marketing Margins, Quality Certifications
needed
Wage Workers: Informal Sector Labour, MNC Salaried Employees, Role of Institutions
User of Public Services: Budgetary Allocation
Common Property Resources: Globalization, Domestic Policies, Short Term vs Long Term Change, International
Coordination, Pollution Havens