Human Capital Exam 3

Front 1

Explain what is meant by “investment in children,” describing the goals and methods of the parents.

Back 1

An investment in children means different things depending on the context. In developing countries, an investment in children is to achieve the goal of higher household income and eventually retirement security. This is achieved because each extra child is one more unit of labor to help out the family business, like a farm. More children means more can be planted and harvested, and when they grow up, they can take over all of the parents’ responsibilities. In the context of a developed country, an investment in children would more likely be referring to educating children in order for them to generate better income and other life returns in their future.

Front 2

Are developing countries experiencing a demographic transition much like the one developed countries did at their earlier stages of economic development or are there important differences?

Back 2

demographic transition: as you develop, you start at a flat rate of population growth (high fertility + high death rates), to rapid population growth (high fertility + lower death rates), to population stability (lower fertility + low death rates)

Differences:

-developed countries exist alongside developing nations, making transition more complicated

-migration from one sector to another without jobs more common

-population growth not as rapid in middle-income countries as it used to be

-fertility rate does not drop off as it should in lower-income countries, leading to gigantism in their cities

Front 3

Explain the reasons for the hidden momentum of population growth and state its implication for population levels.

Back 3

reasons for hidden momentum:

-the tendency of population to grow after the decline in death rates; caused by:

--birth rates don't change overnight

--rapid population growth leads to lots of young people who tend procreate

--population generally takes a couple of generations to stabilize

implications:

-overpopulation, leading to spreading of resources thin, more unemployment, more disease, worse living conditions

Front 4

What is meant by the demographic transition? What are the differences in the demographic transition between the current developed economies and developing countries?

Back 4

demographic transition: as you develop, you start at a flat rate of population growth (high fertility + high death rates), to rapid population growth (high fertility + lower death rates), to population stability (lower fertility + low death rates)

difference: developed countries are in later stages of the transition (population stability) v. developing countries who are in the flat or rapid population growth stage

Front 5

Provide a concise statement about the relationship between population growth and absolute poverty, female wages, rural-urban migration, availability of pensions, availability of healthcare, availability of education, and rate of investment.

Back 5

absolute poverty: all else equal, population growth will increase absolute poverty

female wages: in general, an increase in population will decrease wages, especially for females

migration: population growth will increase rural to urban migration assuming there is a wage differential between the two

pensions: population growth will decrease pension availability due to their finite nature

healthcare: population growth will decrease overall healthcare because there will be less spent per person on healthcare

rate of investment: population growth will decrease rate of investment (assuming capital stock remains constant); capital per worker goes down, output per worker goes down, lowering investment due to lower returns

Front 6

The government of China has explicitly stated that the goal of its strict population control measures is to raise income per capita. What are the mechanisms at work in such a claimed relationship? Are there any counterarguments?

Back 6

Logically, the argument that a lower fertility rate could lead to higher income per capita is sound. If there is less people, it is more likely that a higher share will be able to be gainfully employed and contribute to society. However, there were other factors that may have contributed to China’s rise in per capita income. Their increased economic activity and global trade likely had an effect in raising per capita income. Further, their increased investment in human capital (especially education and healthcare) probably contributed to their increase in per capita income.

Front 7

Suppose the rural wage is $1 per day. Urban modern sector employment can be obtained with .5 probability and pays $2 per day. Will there be any rural-urban migration? Explain your reasoning, stating explicitly any simplifying assumptions, and show all work.

Back 7

The expected value of rural wage is $1 (1 x $1), while the expected value of urban wage is $1 (.5 x $2 + .5 x $0). Assuming everyone is risk averse or risk neutral, there will be no rural to urban migration because there is no certainty that more wages will be earned. Assuming there are risk-loving people, those will be the ones that migrate, as they are willing to chance that they will make double their current wage instead of losing it all.

Front 8

Explain why policies designed to reduce urban unemployment may not greatly reduce poverty in developing countries.

Back 8

Policies designed to reduce urban unemployment are the wrong approach to take if reduction of poverty is the ultimate goal. For one, the more urban unemployment is reduced, the more attractive migration from rural to urban areas becomes due to their rising wages, leading to even more unemployment in the long run. Additionally, reducing unemployment in the urban sector could intensify city bias, leading to investment moving from rural to urban, increasing rural to urban migration, and leading to less jobs overall. To successfully overcome poverty through unemployment reduction, a country must balance investment between both rural and urban sectors to minimize migration and its negative effects.

Front 9

What are the characteristics of those who migrate to urban areas? What positive and negative effects does their leaving have on those who remain?

Back 9

characteristics:

-motivated: definitely more than those who don't migrate

-entrepreneurial: understand their income is tied to their performance

-best educated in family: family sends best shot at making it in urban area

effects:

-generally the rural family left behind is now worse off because their strongest worker is now gone, leading to decreased productivity and yield

-could be better off if the migrator sends money back to the family to help out

Front 10

Explain some important policy measures that you would expect to reduce excessive rural-urban migration.

Back 10

To slow rural to urban migration, the rural area needs to be made more attractive to live and work in. This can be achieved through traditional sector enrichment. One policy to enrich the traditional sector is to provide capital to rural sector workers to upgrade their equipment. This would lead to increased productivity and yield for farmers, which would net them more income, reducing the need to migrate. Another possible policy is to upgrade the agricultural infrastructure of the traditional sector. Things like irrigation systems would help farmers grow healthier and more bountiful crops, again leading to more income and reducing the need to migrate.

Front 11

Are developing country cities too large, too small, or about right in size? Justify your answer with evidence from developing economies.

Back 11

Developing country cities tend to be too large. Due to city biases, there is lots of rural to urban migration, and cities tend to swell. Unfortunately, developing countries lack the capital necessary to make the city function efficiently with the necessary infrastructure like subways, running water, and a proper power grid. Many cities in India exhibit these characteristics.

Front 12

Even though women may often constitute the majority of the rural-urban migrants in a country, they usually still remain employed in the informal sector. Why? What are the consequences of this?

Back 12

This is due to poor institutions. Gender bias ingrained in a developing country is not lessened dramatically depending on where in the country a person is. This leads to men taking all of the good jobs, dominating the formal sector. This limits female positions within the formal sector, and as such, they need to turn to the informal sector to make a living. Men’s employment in the formal sector allows them to accumulate more human capital, further dividing men and women in society and leaving women behind.

Front 13

Discuss the relationship between poverty, growth and the environment.

Back 13

Poverty, growth, and the environment are interrelated. Growth gives rise to a reduction of poverty, but at the expense of environmental degradation, threatening the potential for long-term growth. In essence, growth needs to be balanced with environmental protection in order for the reduction in poverty to be sustainable in the long-run.

Front 14

Why might it be in the direct economic interest of the United States to finance rain forest conservation programs in the Amazon?

Back 14

The health of rainforests have direct effects on the growth potential of the United States and the world in general. Rainforests like the Amazon have positive effects on climate change, which is a problem the whole world is facing. Further, rainforests are the most biodiverse areas in the world, which is key for the biotechnology industry in the US to continue to innovate and grow.

Front 15

Provide a short definition of sustainable development.

Back 15

Sustainable development is defined as development that does not affect future consumption. It can be further broken down in weak and strong sustainability. Weak sustainability is when any scarcity rents collected by development are invested into capital for the future, reducing its overall impact. Strong sustainability is when the development does not affect future consumption at all. Since we are dealing with sustainability over an infinite time horizon, there is no truly strong sustainability when development includes any negative externalities at all.

Front 16

What is the relationship between debt, falling commodity prices and rainforest degradation?

Back 16

Debt, combined with falling commodity prices, leads to more rainforest degradation. Countries saddled by debt and faced with falling commodity prices will be forced to cut down rainforests in order to make up the deficit caused by the decreased value of their commodities.

Front 17

Describe the costs of water pollution.

Back 17

Pollution of water has many effects on the areas surrounding it or for those reliant on it. Water pollution’s obvious effect is the increased cost necessary to convert polluted water into clean water. Another effect is the decrease in the availability of fish and other water-based wildlife. What was once an area to hydrate and catch fish for nourishment is no longer. Water pollution also leads to poor household hygiene, which can decrease health, a major pillar of human capital formation. Further, consumption of polluted water will lead to disease and can lead to death.

Front 18

What are some of the strategies that have been proposed to mitigate global warming at a macro level?

Back 18

Some of the main strategies proposed for mitigation of global warming are cap and trade on carbon, carbon taxes, and subsidies for green technology. Cap and trade sets a ceiling on emissions for firms and allows those that are not utilizing all possible emissions to trade their carbon credits on the market. This is an efficient solution because needs of all firms are different, and it allows the market to sort out the balancing of emissions on a firm by firm basis. Carbon taxes can also be an effective deterrent, but those firms that possess major resource bases may be able to easily pay them while leaving smaller firms unable to compete. Subsidies on greentech can also be effective by encouraging the development of cleaner technologies without imposing costs on all economic players in the market.

Front 19

Why will voluntary actions, undertaken at the individual level, be unlikely to bring about significant reductions in greenhouse gases such as CO2.

Back 19

Voluntary actions are unlikely to bring about significant reductions in greenhouse gases because these individuals already did not take any action to reduce greenhouse gases, leading to the situation we are now in. There is no incentive for individuals to change their behavior at this point in time because resources have not become scarce enough yet. At that point, it may be too late for individual actions to have any meaningful effect. It comes down to the tragedy of the commons. Each individual is acting in their own self-interest, but the collective action of all individuals actually goes against what is best for all in the long run.

Front 20

It costs about $100,000 per acre to create wetlands. How reasonable is this number as an estimate of what wetlands are worth?

Back 20

It is hard to determine if the figure of $100,000 is actually an accurate estimate of worth because wetlands are not something that are bought and sold on the market. In addition, there are many positive externalities associated with wetlands, like recreation and access to fish, that may not be captured by the price to establish them. If anything, that price may be an undervaluation of wetlands’ worth.

Front 21

Why do many communities mandate recycling? Is it possible to induce people to recycle more without requiring that all residents recycle?

Back 21

Many communities mandate recycling to capture the value of recyclable goods that would not exist if they were all sent to landfills. Also, recycling has positive benefits for the environment. Charging for trash is a possible solution because individuals then have the incentive to recycle to reduce their trash load and save money. It also lets the government capture revenue from those who desire convenience over recycling, and this money can be used to fund recycling-related programs.