How can I Answer this?

Yaniv Stopnitzky

Econ 280 / BAIS 103

The Global Economy November 10, 2015

Assignment 3

Poverty, Inequality, and Growth

Due: November 18, 2015 (beginning of class)

1. Pick any two cities in any two countries in the world that use different currencies (at most one

can be from the European Union). Identify five non-traded goods and five traded goods in

each place. Your job is to find out the prices of those goods for both places. It is important

to try and pick the most comparable goods in terms of quality and characteristics for the non-

traded goods. For example, a one bedroom apartment with one bathroom, no elevator in the

building, in the same working class part of town, etc. These exact characteristics don’t matter.

What matters is that the goods’ characteristics are as similar as possible across the two places.

Thinking carefully about this will give you a sense for the practical difficulties of constructing

PPP price indices.

When you enter the prices into the table, it’s very important you keep prices in the local

currencies.

(a) Construct a table similar to the following:

Product Price in City 1 Price in City 2 Price Ratio (1:2)

Non-traded goods

1.

2.

3.

4.

5.

Traded goods

1.

2.

3.

4.

5.

(b) What is the average price ratio of Place 1 to Place 2 for non-traded goods? What about

traded goods?

(c) Now do an internet search to identify the market exchange rate for the currencies of the

two countries’ you selected. How does this market exchange rate compare to the average

price ratio for both traded and non-traded goods? What might explain any differences

you observe?

(d) Go to the World Bank data page here. The figures in the table give you Purchasing Power

Parity exchange rates for various countries’ currencies to dollars. Using the most recently

available 2007-2011 numbers, specify the PPP exchange rate for the two countries you

selected. Depending on which countries you select, a tiny calculation might be necessary.

How does this PPP exchange rate compare to the average price ratio of traded and non-

traded goods? What might explain any differences you observe?

(e) Using the results from this analysis, explain which is the better exchange rate to use for

measuring poverty and inequality in the world? Why? Identify three weaknesses associated

with using that exchange rate for poverty measurement.

2. Pick any country in the world.

(a) Identify its level of GDP and GNI per capita for 2012. Which is higher? What’s the

difference?

(b) Pick either GDP or GNI. What has been this country’s average growth rate for the last 5

years?

(c) Calculate what projected GDP/GNI per capita will be in 20 years assuming this growth

rate trend continues? What about in 50 years?

(d) Recalculate this projected GDP/GNI per capita in 20 and 50 years using a new growth

rate that is the current five year trend plus an additional 4%.

3. Critically evaluate the statement: “If everybody had their basic needs met and had substantial

opportunities to improve their lives, then it wouldn’t matter if income or wealth inequality was

extremely high.”

4. Suppose that the country of Xanadu saves 20% of its income and has a capital-output ratio of

4.

(a) Using the Harrod-Domar model, calculate the rate of growth of total GDP in Xanadu.

What assumption do you need to make to answer this?

(b) If population growth were 3% per year and Xanadu wanted to achieve a growth rate per

capita of 4% per year, what would its savings rate have to be to get this growth rate?

5. Suppose that two countries, A and B, have the same rates of investment and depreciation, the

same levels of productivity, and the same levels of output per worker. They differ, however, in

their rates of population growth. The growth rate of population in Conutry A is greater than

in Country B. According to the Solow model, which country should have the higher growth

rate of output per worker.

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