Economic Development Midterm

  1. Question about the book poor economics. Explain the different views of Sachs vs. Easterly on development in your own words!

Easterly believes that aid to developing countries is not effective in ending poverty than political and economic reforms. His beliefs are rooted in the evident lack of plans to aid developing countries’ aid on development agendas. Also, without proper economic and political policies (which often pave the way for corruption), the aid may fail to meet its developmental objective. In contrast, Sachs believes that poverty is best overcome by amplifying success through the provision of aid to developing countries. Sachs argues that an African green revolution, health revolution, and connectivity are critical developmental concerns, which are all achievable.

  • A country with a population of 100,000,000 has the following income distribution:

– Everyone in the first quintile earns exactly $200/month.

– Everyone in the second quintile earns exactly $350/month.

– Everyone in the third quintile earns $600/month

– Everyone in the fourth quintile earns $1000/month

– Everyone in the fifth quintile earns $2000/month

– Assume the poverty line is at $400/month

a) Draw the Lorenz curve for this country

b) Calculate the headcount ratio

Headcount ratio=(number or people below poverty line)/(total population)

If the poverty line is $400 and the total population is 40 million, the 1st and 2nd quantile of the 4o million are below the poverty line. Therefore, Headcount=40/100*100=40%

c) Calculate the average proportional income gap and the Poverty gap index (P1)

In the first quantile (20 million people), the income gap is (400-200)*20 million=$4000million

In the second quantile (20 million people), the income gap is (400-350)*20million=$1000million

The average income gap (4000+1000)/40=$125

Now P1= 1/N*average income gap, where N is the total population.

Hence P1=1/100*125=1.25

3) Discuss the strength and weaknesses of the following aggregate poverty measures:

a) Poverty gap index P1

The advantage of poverty gap index P1 is that it is a precise indication of a nation’s living standards. It is an indication of how money flows relative to the poverty line. Hence, it can provide a detailed review of poverty in a country. However, it does not show inequality within the poor population, and it does not highlight the prevalence and severity of poverty.

b) Average proportional income gap among the poor

Unlike Poverty gap index P1, the average proportional income gap among the poor indicates inequality among the poor. It enables analysis of the distribution of poverty among the poor population. A significant disadvantage is that it is difficult to interpret.