ECON 355

Final Exam

Dec. 2, 1991

Instructor: Prof. D. DeVoretz

Dept. of Economics

Simon Fraser University

Instructions: Do all three questions. All questions are worth 33 marks. No aids and place all materials and coats in back or front of room. You have three hours. Raise your hand for questions or to leave room. Remember that academic dishonesty will be dealt with severely.

(33 pts.)

1. There exists no general theory of economic development. We have discussed several economic theories that emphasize certain aspects of the development process. These paradigms include:
1. Kuznets Historical or inductive approach.
2. Demographic Transition Theory
3. Labor Surplus Model
4. Capital Accumulation or Neo Classical Theory
5. Trade as an Engine of Growth

From each of the above theories select at least two key conclusions which if followed by your country of choice would hasten the development process. Be sure to identify the key conclusions for each model and support with facts. Finally, what one or more elements of each model does your country of choice fail to meet?

Again, identify the model with the missing ingredient and support with facts.

(33 pts.)

2. Explain in detail both the positive and negative impacts of labor migration in poor countries. With facts from your country explain the rate of urbanization and the subsequent effects on urban unemployment. Next, is the major city (cities) in your country overpopulated? How would you ideally measure this concept and is overpopulation in your country a result of migration? Finally, how serious is the “Brain Drain” or the extent of external migration in your country? Is this drain a result of poor educational policies in your country? Document all your opinions with facts. If your country has no “Brain Drain” then use the Philippines.

(33 pts.)

3. Education has been cited as a necessary but, not sufficient ingredient to development. Outline the economic and non-economic arguments that indicate that education is a positive force in mitigating many of the problems discussed in this course including population growth, urbanization, agricultural development as well as through direct productivity increases (use illustrations from lecture if you have none from your country). Next, outline the paradox where it is profitable for an individual to educate him/herself but, it may be harmful for your country. In short, what if anything should be done about the continuing “brain drain” and what is the optimal educational policy for a typical LDC like the Philippines?

Outline for Answers: points below each section of answer. It must be a complete answer for marks.

1. Part A: 23 points for first part of question
1. Key conclusion for each model are as follows:

i. Kuznets Historical or inductive approach.

1. 2.5% income per capita growth or more

2. 25% capital accumulation annually

3. 50 years of sustained growth

ii. Demographic Transition Theory

1. Drop in CDR and infant mortality followed by

2. Drop in over 30 year old age specific fertility rate

3. Drop in under 20 year old age specific fertility rate

4. All of the above done in less than 25 years

iii. Labor Surplus Model

1. Transfer of unskilled labourer from rural to urban

2. Growth in urban employment which equals migration rate

3. Reinvestment of profits from industrial growth

iv. Capital Accumulation or New Classical Theory

1. Capital accumulation rate greater than labor force growth rate

2. Technical change or increase in marginal propensity to save to raise K/L ratio and income per capita

3. Decline in population growth to raise K/L ratio and income per capita

v. Trade as an Engine of Growth

1. Balance of trade surplus to finance (partially) balance of payments deficit, i.e. capital inflows.

2. Continued shifting in export mix to favor commodities with high income and price elasticity of demand.

3. Foreign investment: in export creating sectors.

i. First stage: using technical cross-breeding of plant to produce a plant that is disease resistant and is good for double cropping or more than one crop a year. Need to buy purchased inputs: seed, fertilizers and tube wells.

ii. Second stage: marketing and credit problems – acceptance of new variety, credit for inputs and a distribution system. (5 pts.)

iii. Third stage: displacement of agricultural labor and commercialization of rural labor force. Land grab and increased rural-urban migration. (5 pts.)

iv. Population growth, failure to export foodstuffs and income redistribution to landowners and creditors. (5 pts.)

Part B: 10 points

Missing ingredient: student should refer to above list and note which part of which model is missing and support with facts.

3. Education
1. Population growth: needed for contraception and increased urbanization and female labor force participation reduces late and early age-specific fertility rate. (5 pts.)
2. Urbanization: education leads to outflow of highly skilled to urban areas and dampens agricultural growth. Use Philippines rate of return for rural-urban movement for educated vs. unskilled. (5 pts.)
3. Use age-earnings profiles to demonstrate that education is good for the individual at home or by migration. Shift the earnings profile down and add costs (taxpayers subsides) to show that the gain is smaller relative to costs. Otto they must have the age-earnings profiles to get credit. Policy, developed countries should be taxed to pay for immigrant education subsidy and LDC’s should concentrate on educating up to secondary schooling. (15 pts.)