Growth and Development Economics exam

QUESTION 1

a. Consider the following data for the countries Alpha and Beta:

Country GDP/Capita Exchange rate Purchasing power parity
Alpha $400 2 $/€ 1.5 $/€
Beta €250
Explain which of these countries is richer and why.

b. Suppose that the purchasing power parity between two countries is measured as the relatie price
of a can of Coca Cola. Is this a good PPP-measure? Explain.

c. Consider the following informaton on the income distributon in Alpha and Beta.

Country Poor Middle-class Rich
ALPHA
Aierage income leiel 70 450 910
Group size 30 45 15
BETA
Aierage income leiel 70 300 460
Group size 20 30 10
Draw the Lorenz curies for Alpha and Beta in one graph. Use the separate answer form.

d. Consider the following informaton on the income distributon in Alpha and Beta (same as in the
preiious questonn).

Country Poor Middle-class Rich
ALPHA
Aierage income leiel 70 450 910
Group size 30 45 15
BETA
Aierage income leiel 70 300 460
Group size 20 30 10
Explain whether income inequality is higher in Alpha or in Beta.

e. A predicaton of standard trade theory is that increasing internatonal trade might increase income
inequality in some countries and decrease it in others. Explain this predicton and indicate whether
this predicton is borne out in practce.