(a) What is the usual indicator of living standards? (b) How is this indicator of living standards calculated? (c) What are the problems with this indicator? 2. Consider a country whose national income is $750 Million and whose population is 12.5 million.

⦁ (a) What is the usual indicator of living standards? The gross domestic product (GDP) per capita is widely regarded as one of most accurate indicator of a country's standard of living. The total amount of goods and services produced by everyone within a country's borders is defined as its gross domestic product (GDP). ⦁ How is this indicator of living standards calculated? A country's gross domestic product per capita is calculated by dividing its total population by its total domestic product. ⦁ What are the problems with this indicator? The Gross Domestic Product (GDP) or the national revenue will be divided by the same token among all country citizens. As a result, there will be no distinction between rich and poor people in this country. As a result, it will be impossible to reflect the population's living standards accurately. 2. Consider a country whose national income is $750 Million and whose population is 12.5 million. Assume in this country that the rich are 20% of the people and own 85% of the nation s income. ⦁ The income per capita of the nation 750M/12.5M=60 ⦁ The income per capita of the rich 637.5/3.5=255 ⦁ The income per capita of the poor 112.5/10=11.25 ⦁ If the total income of the rich increases by 50%, the new nation’s income Rich income increment 637.5+(637.5/2) =637.5+318.75=956.25# Nation’s income=956.25+112.5=1068.75 Nation’s income per capita 1067.75/12.5=85.5 ⦁ The growth rate of the nation’s income per capita. 85.5-60/60 *100=42.5% ⦁ Can we conclude that the living standards have improved in this country? Why? A 42.5 percent increase in the country's income growth rate does not mean that living standards have improved. Everyone in a nation is given the same amount of money because GDP is calculated per capita. Increased income for the wealthy is to blame for the nation's rising income growth rate, not increased revenue for the poor. While the rich's standard of living may increase, the poor's will remain stagnant as a result. 3. Assume the growth rate of income is 10% and the population growth rate is 5.83%? ⦁ The doubling time of income 70/p = 70/10 = 7 years ⦁ The doubling time of population 70/p = 70/5.83 = 12 years ⦁ The doubling time of income per capita 70/ (10-5.83) = 16.79 years. 4. Consider the following information about a developing country: Income per capita $1037 Life expectancy 43 years Adult literacy 53% Gross enrollment 46% ⦁ Income index [ log (1037) – log (100)] / [log (40000) – log (100)] = 1.01577/2.60205=0.39 ⦁ Life Expectancy index (43-25) / (85-25) = 0.3 ⦁ Education index 2/3*(0.53) + 1/3*(0.46) = 0.5066 ⦁ Human Development index 1/3* 0.39 + 1/3 * 0.3 + 1/3 * 0.5066 = 0.39 ⦁ Consider the Harrod-Domar model: ⦁ If capital output ratio is 3, and the saving rate is 27%. The growth rate of income 27%/3 = 9% ⦁ To increase the growth rate of income, what do we need to do? To increase the income growth rate, we need to save a more significant portion of the revenue. ⦁ If the country wants to grow at 5%, the capital-output ratio is 2. The nation should save what percentage of the nation s income Capital-output ratio * Growth rate = 5% *2 = 10% ⦁ What are the criticisms of the Harrod-Domar model? People in developing countries often do not have enough money to eat. Since one cannot tell people to save more, one cannot give them financial advice. Loans can be made to developing countries if developed countries cannot save more of their incomes. While lending money to developing countries is expected, developed countries may refuse to do so if they do not believe they can repay their loans. Human resources are also a problem in developing countries. Due to a lack of qualified workers, the country cannot generate additional revenue or amass additional savings. ⦁ Consider the Lewis Theory of structural change. What are the assumptions that are considered unrealistic in this model? For structural change to occur, a company must first make a profit before increasing the number of machines it buys and thus the number of people employed. Many more people will move from agriculture to manufacturing as a result. However, business owners invest in something else instead of purchasing more machines. Because of this, new machines may outperform older models when it comes to delivering value to businesses. Consequently, companies may not need additional staff to operate the new machine. So, the rate at which things change will begin to decline at that point. Having a fixed wage is unrealistic because some people will quickly discover that the cost of living in the city is significantly higher than in their village. A rise in labor cost will result in less demand for it, resulting in lower wages for workers. In order to attract more workers, businesses will have to pay higher wages than they prefer. This also reduces the need for labor. As a result, workers in developing countries are ill-equipped to use the machines. This means they will have to pay for training, and they will be less likely to hire workers from the countryside in the future. ⦁ Consider the following table with individuals in a country and their incomes: Individuals Income Deciles Quintiles 1 1 1 2 3 3 4 3 5 5 4 8 8 13 5 10 10 6 12 12 22 7 13 13 8 15 15 28 9 16 16 10 17 17 33 Total 100 100 100 ⦁ Calculate the deciles and quintiles. For instance, when a set of data is divided into five equal parts, each of them is called a quintile, which refers both to the cut-off points as well as the group of values contained. When a set of data is divided into ten equal parts, each of them is called a defile’s decile are from top to bottom, 1, 3, 5, 8, 10 , 12 , 13 , 15 , 16 , 17.Quintile from top to bottom is   (1+3)=4 ,  (5+8)=13 , (10+12)=22 ,. (13+15) =28, (16+17) =33. ⦁ The Kuznets ratio Income of top 20% / % income of bottom 40%=33/17=1.94 c) Palma ratio 10% *100=10% 40%*100=40% 10%/40%*100=25% ⦁ Consider the following table with individuals in a country and their incomes. Fill in the following table: Individuals Income % of income recipients % of Income 1 $4 10% 1 2 $8 20% 3 3 $16 30% 7 4 $20 40% 12 5 $28 50% 19 6 $40 60% 29 7 $44 70% 40 8 $60 80% 55 9 $80 90% 75 10 $100 100% 100% Total $400 Draw the Lorenz curve for this country: % of income recipients ⦁ Consider the following Lorenz curves for countries A and B: ⦁ Which country has a higher income inequality? Country B ⦁ Which country has a higher Gini coefficient? Country B ⦁ What is bad about income inequality? The vast majority of people in developing countries lack the assets necessary to secure a loan, making them ineligible. Consequently, they cannot purchase more equipment to expand their business or further their educations. People in the middle of the income spectrum have the highest savings rates of any socioeconomic grouping. However, in a developing country, many middle-class citizens are deficient. There will be only two groups of people in the country: the wealthy and poor, who will have the lowest saving ratios. The wealthy of a developing country spend their money on imported luxuries and put them in foreign financial institutions. Income disparity has a negative impact on social cohesion and stability. 10. Consider the following graph for the labor market in a developing country: ⦁ Total income Wage + Profit 150000 + 87500 = 237500 ⦁ Total wages 300*500 = 150000 ⦁ Total profits ½ (650-300) * 500 = 87500 ⦁ The share of workers out of the nation s income Wage/ Income 150000/237500 = 0.63 ⦁ The share of capitalists out of the nation s income Profit / Income 87500/237500= 0.37 11. Consider the following table of annual incomes of individuals in a country. Assume the poverty line is at $1 per day: Individual Income 1 465 2 215 3 505 4 325 5 275 6 400 7 175 8 265 9 105 10 65 ⦁ The headcount index 7 (total number of individual have income less than $365/a year) Headcount Index = 7/10 The total poverty gap = (365-215) +( 365-325) + (365-275) + (365-175) + (365-265) + (365-105) + (365- 65) =1130 ⦁ The total poverty gap 1130/10= 113 ⦁ The average poverty gap 1130/ 7 = 161.43 ⦁ The average income shortfall 365/10=36.5 ⦁ Suppose a country has a birth rate of 25 per 1000 of the population, a death rate of 15 per 1000 of the population, and no net migration. What is the population growth rate? The population growth rate = [1000+( birth rate – death rate)]/ 1000 = [1000+(25-15)]-1000/1000 = 1% ⦁ Consider the Malthusian model: Forecast the population growth rate, income growth rate, and income per capita for a country with the following initial income per capita: Initial Final Final Final Income per capita Population Growth Income Growth Income per capita $16,000 2.3 2.3 $15,439 $15,439 2.3 2.3 $15,439 $7,891 2.3 2.3 $15,439 $5,674 2.3 2.3 $15,439 $4,367 0.56 0.56 $1,685 $1,685 0.56 0.56 $1,685 $981 0.56 0.56 $1,685 ⦁ Consider the household theory of fertility. If the income of the household is $250, and the price of a child=$25, while the price of goods=$5: ⦁ X =250/25=10 ⦁ Y = 250/5=50 The equilibrium number of children and goods is always determined by dividing the income equally between them. ⦁ The initial equilibrium number of children 125/25=5 ⦁ The initial equilibrium number of goods 125/5=25 ⦁ Start from the initial equilibrium in the following graph. If the cost of children declines to $12.5 only, draw the new household s budget line and the new household s equilibrium? New Children price = $12.5 New X = 250/12.5 =20 New equilibrium number of children = 125/12.5=10 (f)Start from the initial equilibrium again. If the income of the household doubles because men got better-paying jobs, draw the new household s budget line and the new households equilibrium? ⦁ Start from the initial equilibrium again. If the income of the household doubles because women are working and contributing to the income of the household, which increases the opportunity cost and the price of children to $50, and the price of goods=$5. Draw the new household s budget line and the new household s equilibrium. new household’s = 50 → X =500/50=10 Py = 5 → Y = 500/5 = 100 New equilibrium number of children = 250/50=5 New equilibrium number of good = 250/5=50 15. Consider the Harris-Todaro model: 0 375 525 875 1000 Assume full employment and exible wages: (a) Manufacturing wage = 6 (b) Agriculture wage = 6 (c) Manufacturing employment = 1000 – 525 = 475 (d) Agriculture employment = 525 If labor unions raise the manufacturing wage to $70, and assuming full employment: (a) Manufacturing wage = 70 (b) Agriculture wage = 4 (c) Manufacturing employment = 1000-875= 125 (d) Agriculture employment = 875 If labor unions raise the manufacturing wage to $70, and not assuming full employment: (a) Manufacturing wage = 70 (b) Agriculture wage = 14 (c) Manufacturing employment =1000-875= 125 (d) Agriculture employment = Children Goods 0 X Y (e) Total Unemployment =875-375= 500 (f) Unemployment rate in urban areas = 500/ (1000-375) = 0.8= 80% (g) Unemployment rate in country = 500/1000 = 0.5= 50% Expected Wage in Manufacturing = (0.8) *0 + (0.2) * (70) = 14 ⦁ Consider the child labor model of multiple equilibria: Forecast the wage and the level of child labor and adult labor in a country with the following initial wages: Initial Final Final Final Wage Wage Adult Labor Child Labor $115 $123 10485 4476 $123 $123 10485 4476 $130 $123 10485 4476 $154 $154 10485 1891 $160 $187 10485 0 $187 $187 10485 0 $190 $187 10485 0 ⦁ Consider the following graph for a 13 years old who decides whether to attend a secondary school or drop out of school after primary education. Describe the decision of this person and its determinants? The direct cost = 24.98 The indirect cost = 23.67 The total cost = the direct cost + The indirect cost = 24.98+23.67= 48.65 The benefit= 49.75