CHAPTER 1

INTRODUCTION

1. Suppose your friend a strong on defense and insists that we must bolster our
national defense, whatever the cost. How can you use economic logic make him or
her aware of the opportunity costs associated with his or her objective?

Ans. Use the production possibilities curve to show that increased resources
allocated to national defense entail decreased amounts of other goods and services.

2. Unemployment imposes serious hardship on out-of-work individual and their

families. What are the cost of unemployment to society as a whole? ( keep in mind
the production possibilities curve.)

Ans. The economic and social costs of unemployment include personal costs (lost
income), costs to government (lost tax revenue) and costs to society in general
(social problems, lost GDP)

3. Why, in the rich nation, is it important that we fully use our resources and
technology to maximize our nation’s out? Is it only level of total output that is
important, or are the type of output that we produce also important? Do you think
that the distribution of this output is just as important as its total amount?

Ans. By using our resources and technology to their fullest, we increase our
production and we generally assume that this raises our standard of living. Greater
output also implies that we can be more generous in our foreign aid to poorer
nations. Types of output are also important. For example, if we produce military
goods instead of public health goods, the average standard of living may be
adversely affected. If we produce capital goods instead of consumer goods, the
capital goods go into our resource supply and cause greater economic growth in the
future (and greater production of both capital and consumer goods)

4. Do you think our nation’s output should be distributed according to income or a

according to some other standard ( such as basic human need)?

Ans. National income should be distributed according to the needs such as the
poverty index and supply of other basic needs such as healthcare, water sanitation,
education e.t.c. these will ensure equality among the population and enhance social
justice. a society that is just will always coexist in peace and harmony

5. Equilibrium implies that quantity demanded equals quantity supplied at a particular

price. Must consumers and producers actually sit down to discuss and decide on an
equilibrium market price? Is a farmers’ market or a flea market a competitive
market? Why or why not?
 Ans. The equilibrium price is the only price where the plans of consumers and the
plans of producers agree that is, where the amount consumers want to buy of the
product, quantity demanded, is equal to the amount producers want to sell, quantity
supplied. This common quantity is called the equilibrium quantity.

6. Does the efficiency of the price mechanism ensure that our market-based economy
is an equitable one? Why or why not?

Ans. No. Equity usually involves topics like income distribution, poverty,
discrimination, consumer or worker safety, and so on. These may certainly be
problems in a market economy.

7. The following schedules are for bushels of apples in a local market. Graph the
supply and demand curves. What are the equilibrium price and quantity

Ans. a. The equilibrium price and quantity will fall under 16 as price, 600 as
quantity.
b. The new equilibrium price is 18 pesos and the quantity are 400.

8. Go to Web site at http://netec.mcc.uk/JokEc, find a good economics joke. And

share it with your teacher!

Ans. geologist, physicist and an economist are marooned on a desert island with
nothing to eat.
A can of soup washes ashore. They ponder how to open it. The geologist says,
‘Let’s smash it open with a rock.’ The physicist says, ‘Let’s heat it up and blow it
open.’ The economist says, ‘No, no. You guys will lose most of the soup. Let’s just
assume we have a can opener.

9. One additional source that may be useful if you need to do research on economics
topic is the Web site of the British periodical, The economist. Its articles on various
topics can usually be understood by beginning students of economics. You can find
this site at http://www.economist.com.
 Chapter 3
GROWTH AND THE ASIAN EXPERIENCE

1. The Harrod-Domar growth model is based on the fundamental Keynesian

relationship between consumption and income. How does that relationship fit into
the Harrod-Domar model?

Ans. The Harrod–Domar model is a classical Keynesian model of economic

growth. It is used in development economics to explain an economy's growth rate
in terms of the level of saving and productivity of capital. It suggests that there is
no natural reason for an economy to have balanced growth.

2. If the marginal propensity to consume in the Keynesian model increases ( b in the

equation C=a+bY), what happens to the saving rate? What does this say about
countries that save a large proportion of income relative to those that save less in
term of growth in the Harrod-Domar model?

Ans. ncreasing the savings rate, increasing the marginal product of capital, or
decreasing the depreciation rate will increase the growth rate of output; these are
the means to achieve growth in the Harrod–Domar model.

3. Suppose the efficiency of the economy improves in the sense that more output is
generated with the same capital stock. What will this do to the growth rate in
Harrod-Domar model?

Ans. Although the Harrod–Domar model was initially created to help analyse the
business cycle, it was later adapted to explain economic growth. Its implications
were that growth depends on the quantity of labour and capital; more investment
leads to capital accumulation, which generates economic growt

4. What does the population growth adjustment to the Harrod-Domar model do to the
growth path income?

Ans. A model clarifies how development has happened and how it might happen
again. Development procedures are the things a legislature may acquaint with
duplicate the result recommended by the model. Essentially, the model
recommends that the economy's pace of development relies upon the degree of
national sparing and the efficiency of capital venture this is known as the capital-
output ratio. If the capital-output ratio is low, an economy can deliver a ton of
output from somewhat capital. if the capital-output ratio is high, at that point it
needs a great deal of capital for generation, and it won't get as a lot of estimation of
output for a similar measure of capital.

5. How would the growth of Europe following the bubonic plague episode in the
thirteenth to seventeenth centuries have been affected if Europe had been following
 the growth path described by the Harrod-Domar model. Do you think this actually
happened? If not, why not?

Ans. The Black Deatch was the biggest statistic debacle in European history. From
its appearance in Italy in late 1347 through its clockwise development over the
mainland to its diminishing in the Russian hinterlands in 1353, the magna
pestilencia an extraordinary disease murdered somewhere in the range of seventeen
and twenty century have 8,000,000 individuals died. Its horrifying indications and
danger have fixed the Black Deatch in well known creative mind; also, revealing
the ailment's social, social, and financial effect has drawn in ages of researchers.
Regardless of developing comprehension of the Black Death's belongings,
conclusive evaluation of its job as chronicled watershed stays a work in
advancement. Expanding the investment funds proportion in lower-salary nations
isn't simple.

6. What are the main differences between solow and Harrod-Domar models? Is the
Solow model more realistic? How does it introduce more realism into its
assumptions?

Ans. The main difference between the Harrod-Domar (HD) model and the Solow
model is that HD assumes constant marginal returns to capital, while Solow
assumes decreasing marginal returns to capital.

7. What is the steady state in solow model? Describe in words why the economy tends
toward the steady state?

Ans. The steady-state is the key to understanding the Solow Model. At the steady-
state, an investment is equal to depreciation. That means that all of investment is
being used just to repair and replace the existing capital stock. No new capital is
being create

8. What are the variables that the solow and Harrod-Domar models share in common?

Ans. The common things of Harrod and Domar models depend on Keynesian
speculation balance as a state of enduring development. The models are planned as
far as exploratory balance way both. They both feel for the presentation of dynamic
component for achieving consistent development in an economy and they know
about the Keynesian challenges.

9. Explain how per-capita income in the steady state can increase in the solow model.

Ans. The shift from a lower to a higher steady-state level of output causes a
temporary increase in the growth rate. In the Solow model, an increase in the
population growth rate raises the growth rate of aggregate output but has no
permanent effect on the growth rate of per capita output.
10. Explain intuitively what the new growth theories add in term of realism to the solow
model.

Ans. Robert M. Solow, Trevor Swan, and James E. Meade,this 3 economist

challenged asserted that the capital-output ratio should not be exogenous in the
model of Harrod-Domar Model. So now, they proposed a development model
where the capital-output ratio which was correctly the changing variable that would
lead a framework back to its unfaltering state development way, for example that
"v" would move to bring "s/v" into uniformity with the normal pace of
development. The subsequent model has turned out to be broadly known basically
the "Neoclassical" development model.

11. Are structuralist to economic growth consistent with the Harrod-Domar theories of
growth? How do they differ in emphasis?

Ans. Each economy must spare a specific extent of its national pay, if just to
supplant exhausted or hindered capital products like structures, hardware, and
materials. In any case, so as to develop, new speculations speaking to net
augmentations to the capital stock are fundamental. On the off chance that we
expect that there is some immediate financial relationship between the size of the
absolute capital stock, "K", and complete GNP "Y" instance, if P30,000 of capital
is constantly important to create a P10,000 stream of GNP it pursues that any net
increments to the capital stock as new contribute.

12. List the important variables that economics have identified that contributed to the
rapid growth the Asian economies in the decades of the 1960s to the mid-1990s.
How do these variables relate to the variables discussed in the three growth models
(Harrod-Domar, Solow, and new growth)?

Ans. The Harrod Domar Model suggests that economic growth rates depend on two
things (Level of Savings (higher savings enable higher investment) Capital-Output
Ratio. A lower capital-output ratio means investment is more efficient and the
growth rate will be higher.

13. Other developing regions of the world have not been as successful in raising their
standards of living in this period. Can you identify several factors that might have
been responsible for these poorer results?

Ans. Overpopulation, war and climate change are factors that can have a serious
impact on the issue of global poverty. Lack of infrastructure is another contributing
factor.

14. What evidence is there that there has been a convergence incomes among the
countries and regions of the world, according to Robert Barro? How do his result
compare with those we would expect from solow model?
 Ans. An externality in the production of human capital implies that inequality slows
down growth under autarky. Eventually incomes converge, raising the growth rate.
Trade accelerates (slows down) growth and the rate of income convergence in the
poor (rich) country. In the long run trade ensures that countries grow at the same
rate and that the ratio of their incomes tends to 1. Trade pattern reversals are
possible since the initially wealthy country may be overtaken by the poor country.

15. What is the difference between conditional convergence and absolute convergence?
What do you think would be the result if we tested conditional convergence
between South Asia, and Southeast Asia, and East Asia?

Ans. Absolute convergence"means a series will converge even when you take the
absolute value of each term, while Conditional convergence means the series
converges but not absolutely

16. What measures can the poorer countries take to accelerate their growth to bring
their standards of living more in line with rest of the world?

Ans. Attempting to close the socioeconomic gap created by poverty, there are three
initiatives that governments and national organizations can take to improve health
in developing countries. Investing in Education. Increasing Health Benefits for the
Poor. Promoting primary and essential healthcare.

17. What does the term Asian “mirazcle”mean? Discuss the key aspects of this
“miracle” as it evolved during the decades prior to the Asian financial crisis. Be
specific, using country examples.Which of these factors do you believe to be the
key ingredients to rapid growth?

Ans. Prior to the 1997 Asian financial crisis, the growth of the Four Asian Tiger
economies (commonly referred to as "the Asian Miracle") has been attributed to
export oriented policies and strong development policies. Unique to these
economies were the sustained rapid growth and high levels of equal income
distribution.

18. How do the factors that you have identified reflect on the proposition that the Asian
“miracle” was a result of “perspiration” and not “ inspiration”

Ans. East Asia's high performers grew rapidly because they were ruled by
authoritarian leaders. They show that these leaders had to collaborate with various
sectors of their population to create an environment that was conducive to sustained
growth.
 Chapter 4
THE ASIAN CRISIS AND RECENT DEVELOPMENTS

1. The Asian financial crisis was a surprise to most economies, even those that
specialized on economic developments in the region. Why do you think this
happened?

Ans. On 2 July 1997, due to speculative attacks, Thailand was forced to float their
currency the Thai Bhat. This caused a rapid devaluation, which triggered a loss of
confidence throughout the Asian economies. Soon, other countries were forced to
devalue as investors wanted to get out of Asian currencies.

2. Can you generalized the result of yours of your analysis in answering question of
predicting an economic shock?

Ans. Asian financial crisis was stemmed somewhat due to financial intervention
from the International Monetary Fund and the World Bank. However, the market
declines were also felt in the United States, Europe, and Russia as the Asian
economies slumped.

3. Can you think of a few other instances of economic crises that came as a surprise
to government, business , financial, and academic observers? What do they have in
common with the Asian financial crisis? What are the dissimilarities?

Ans. Economic crisis in Argentina. The crisis was caused by the lack of co-
ordination between monetary policy and fiscal policy, which ultimately led to the
collapse of the banking system. The financial crisis of 1890 left the government
with no funds for its immigration subsidies programme, and it was abolished in
1897.

4. Explain how the institutions and cultural setting of financial institutions in Asia
contributed to the crisis?

Ans. The financial institution involves close government co-operation with rers of
export products, including subsidies, favorable financial deals, and a currency peg
to the U.S. dollar to ensure an exchange rate favorable to exporters.

5. Have these institutions changed since the crisis? If so, in what ways?

Ans. Financial institutions like banks were insolvent, with negative equity and high
non-performing loans.” They were also in the grips of a negative spread in the
banking system, with average net interest income in the banks at 15% and cost of
funds at 70%. Moreover, banks had lost all power they ever had over their big
clients.
6. Knowing what we know now about crisis, do you think governments are better able
to predict the onset of another crisis? What kind of measures would you put in place
to monitor economic and financial activity as an early warning system?

Ans. Two things could have prevented the crisis. The first would have been
regulation of mortgage brokers, who made the bad loans, and hedge funds, which
used too much leverage. ... Regulation could have softened the downturn by
reducing some of the leverage. It couldn't have prevented the creation of new
financial products.

7. How did SARS and the Iraqi war affect the Asian region? Were these impact similar
to those of the Asian crisis? How were they different?

Ans. (SARS) outbreak in Iraq hit Asian economies hard, coupled with concerns
over the US economic health, continued to fuel selling on stock markets across the
region. ... “The war in Iraq was not the only factor that dampened sentiment in the
equity markets.

8. Some observers have suggested controls to cut down on the volatility of capital
movements. What are the advantages and disadvantages of such proposal?

Ans. The advantage of it is that you are lowering your average cost per share of
that particular security. This volatility provides an excellent environment for those
with long-term time horizons, especially millennials and later generations, with an
opportunity to increase their returns over time by making additional investments.
The disadvantage of it is that Investors occurs in part as investors generally flee
market volatility and the disappointing fund returns that can accompany that
volatility, and then chase past performance as markets improve.

9. Government have built up significant levels of foreign reserves since the financial
crisis. Discuss the policy issues relating to such a policy. What would you say to
the statement: “ You can never have too much foreign reserve cushion.”

Ans. Because its implicit in the concept of maintaining a currency peg, which
represents a commitment by the government to buy and sell foreign exchange
(specifically, the peg currency) at a fixed price in terms of local currency. The
government can only fulfill that commitment if it actually has foreign exchange on
hand to sell. If the government runs out of foreign exchange or even comes close
that situation can easily provoke an economic crisis.

10. The Asian financial crisis has been characterized as a crisis of the private sector in
contrast to previous crises in latin America that originated in the public sector.
Comment on this characterization using concrete examples from the Asian crisis
countries. Discuss the progress that has been made in dealing with the aftermath of
the Asian crisis in at least two countries. Be specific about the measures undertaken
 Ans. The overflow impacts of the Asian crisis, transmitted to Latin America by the
channels of exchange and account, have influenced various nations in various ways
and have been met with approach measures in the fiscal, budgetary and exchange
circles. As the second quarter of 1998 starts, there is an inclination of unassuming
fulfillment in the locale about government treatment of the crisis and the heartiness
of economies. In purpose of fact,speculative assaults on various monetary standards
have been upset, downturns on financial exchanges have been stopped and
somewhat turned around, and residential loan fees and outside credits are steadily
retuning to pre-emergency levels. Regardless, the approaches put in spot to manage
the Asian emergency and the new worldwide setting it has produced involve costs
for the area and will antagonistically influence its development prospects.
Obviously, they are definitely not the main motivation behind why development
figures for 1998 have been updated descending different elements incorporate
surprisingly terrible climate conditions expanded usage of limit up to this point
underutilized, in certain nations and, in others, the inconceivability of looking after
development rates at 1997 levels in perspective on the quick extension in outer
awkward nature. Diminished oil creation and a drop in oil costs are further
contributing variables, and are having a significant sway on the outside and
financial records of certain nations.

11. The recent financial crisis in the industrial countries is not expected to have as big
an impact on the Asian economies as the financial crisis of 1907. Example why this
is so.

Ans. The Asian Financial Crisis of 1997 alludes to a macroeconomic stun

experienced by a few Asian economies including Thailand, Philippines, Malaysia,
South Korea and Indonesia. Regularly nations experienced quick depreciation and
capital outpourings as financial specialist certainty abandoned over-extravagance
to infectious cynicism as the basic irregular characteristics in the economy turned
out to be progressively evident. The 1997 crisis pursued quite a long while of fast
financial development, capital inflows and develop of obligation, which prompted
an unequal economy. In the years going before the emergency, government
acquiring rose, and firms overstretched themselves in a 'run for development' When
market supposition changed outside financial specialists looked to lessen their stake
in these Asian economies causing destabilizing capital surges, which caused quick
depreciation and further loss of certainty.
 Chapter 5
AGRICULTURE

1. What are the major factors that contributed to productivity gains in agriculture in
Asia in the past twenty-five years? Is the rate growth of the agricultural sector likely
to slow down or accelerate?

Ans. Factors that affect farm productivity and often can't be in the control of the
farmer are Weather, The Capacity of a Given Farm , Pests, vailable Equipment ,
The Supply and Demand in the Market

2. There has been considerable discussion of the role of mechanization in creating

employment and raising labor productivity. Are there any general guidelines to
follow in suggesting a mechanization policy for the Asian developing countries?

Ans. The trouble comes from the issue of estimating the unpredictable connections
required, from the quantity of variables to be considered, and from the political
ramifications included. Most creating nations are principally agrarian social orders
in which agribusiness is the primary wellspring of riches. Accordingly, an
expansion in agrarian profitability is the essential necessity for setting the entire
provincial advancement process moving, and for the general financial improvement
of these nations. In any case, rural creation doesn't take place in seclusion, however
is a piece of the structure and standard of conduct of people and gatherings inside
the entire of country society. Rustic improvement, in this way, goes past
horticultural improvement alone. It includes every one of the individuals and assets
in the provincial setting and underscores improvement in the degree of living of the
rustic poor and involvement of every single country individuals in the advancement
procedure, with a definitive points of lessening appetite and neediness and of
improving the personal satisfaction

3. Consider two countries, one that subsidizes agriculture, and another that subsidizes
industry. The are identical in all other respect. Which country has a better chance
of achieving rapid growth with property reduction?

Ans. Subsidize Agriculture because that means the import market can focus on
tropical items that may not grow on croplands. The presence of subsidies helps to
keep specific agricultural products affordable, allowing items grown in a country
to stay in that country.

4. Why are the term of trade between agriculture and industry so important in
determining the rate of growth of an economy in the transition from focusing on
agriculture to manufactured products?

Ans. The changing landscape of agricultural markets and trade. Trade plays a
crucial role in delivering food and clothing to consumers worldwide. It helps to
 provide greater choice in consumer goods, and has played a role in reducing food
insecurity across the globe.

5. Genetically modified crops (corn, for example) have been developed in the United
State and are being exported around the world. There is, however, resistance to
these export in many countries. Why do you suppose this is so?

Ans. One of the reasons for the lack of progress in the negotiation is the developed
countries' unwillingness to reduce their enormous farm domestic subsidies and
massive agricultural trade distortion

6. Africa seems to be locked in a cycle of producing agricultural product for export.

The term of trade for these goods continue to deteriorate, creating a downward
cycle of slow or negative growth. How has Asia avoided such a cycle? What are
the major factors involved?

Ans. Factors that affect slow or negative growth of Agriculture is Population

Pressure, Uneconomic Holdings, Uncertain Monsoons and Inadequate Irrigation
Facilities, Subsistence Nature of Farming, Decline in Soil Fertility, Lack of Support
Services, Poor organisation of Resourdces and Lack of Entrepreneurship

7. You are having a discussion with another student who says that agricultural growth
is not important when it comes to understanding the experience of economic
development in Asia. How would you respond to this statement? What kind of
evidence is there to either support or refute the student’s statement? Use specific
country or regional examples where possible.

Ans. Agricultural sector plays a strategic role in the process of economic

development of a country. It has already made a significant contribution to the
economic prosperity of advanced countries and its role in the economic
development of less developed countries is of vital importance.

8. What changes have been occurring in the structure of agriculture in Asia in the past
two decades?

Ans. Climate change affects agriculture in a number of ways, including through

changes in average temperatures, rainfall, and climate extremes (e.g., heat waves);
changes in pests and diseases; changes in atmospheric carbon dioxide and ground-
level ozone concentratio

9. Explain why research and development are much more important now that they
were a few decades ago.

Ans. Agricultural research has an important role to play in meeting these targets,
since many of the new technologies, inputs, and techniques of production that
increase agricultural productivity are developed through agricultural research.
 Chapter 6
INDUSTRIALIZATION AND STURCTURAL CHANGE

1. Assess the strength and weakness of the Lewis-Fei-Ranis model of economic

growth and structural transformation. Can you think of ways to improve the model?

Ans. The strengths of it is recognizes the presence of a dual economy comprising

both the modern and the primitive sector and takes the economic situation of
unemployment and underemployment of resources into account, unlike many other
growth models that consider underdeveloped countries to be homogenous into this
theory, the primitive sector consists of the existing agricultural sector in the
economy. The disadvantage of it is While mentioning the important role of high
agricultural productivity and the creation of surplus for economic development,
they have failed to mention the need for capital as well. Although it is important to
create surplus, it is equally important to maintain it through technical progress,
which is possible through capital accumulation, but the Fei-Ranis model considers
only labor and output as factors of production.

2. There are two strands of thought regarding industrialization. The first says that it is
important to have a large market in order to take advantage of scale economies and
to produce efficiently at low cost. The second says that small-scale industries have
been very successful because they have been able to take advantage of shift in
demand, innovation, and fashion because of their size. How do you reconcile these
two ideas?

Ans. The first statement is a big advantage to us people in terms of purchasing

goods in the market as it lowers the price we will pay to it. Also tha second
statement is also benificial to small scale business owners as thet have that
flexibility to the current issue that is happening to our economy as they can adjust
their own preferences in their style of selling.

3. Does the answer to Question 2 have anything to do with changes in technology over
the past several decades?

Ans. Yes, because technology play a big role in our economy as it lessen the labor
need of a company which it is not beneficial to us but on the other side it make the
production of goods more easy and more less cost.

4. The debate is over whether the rapid growth in Asia was a result of “inspiration “
or “perspiration “ what exactly does this phrase mean? Explain the argument for
both sides. Has there been a shift in the evidence over time? If there has, what do
you think are the reason for this shift?
 Ans. The vast majority of this development happened in eight economies,
altogether alluded to as the High Performing Asian Economies (HPAEs) – Japan,
Hong Kong, the Republic of Korea, Singapore, Taiwan, and the recently
industrializing Indonesia, Malaysia, and Thailand. The connection between open
arrangement and monetary development is currently more significant than any
other time in recent memory, and in light of the proceeding with financial
emergency in Europe, there are various exercises to be gained from the
accomplishment of the HPAEs. The Asian Supernatural occurrence of the second
semester/part of the twentieth century can be to a great extent ascribed to the tyrant
systems actualized by household governments. The financial achievement in East
Asia during the second semester of the 20th century can be to a great extent credited
to sweat through the advancement of key government approach, which right up 'til
today keeps on cultivating development, development and consistent improvement.
Asia's prosperity was assuredly not a medium-term marvel. It unquestionably is,
however, a delineation of the significance of center arrangement activities and
progressing investigation, still clear today as the administrations of the HPAEs face
new financial difficulties and find a way to guarantee they proceed down a way of
ceaseless monetary development.

5. Alice Amsden and Michael Hobday, among others, argue that the total factor
productivity debate misses the point. What exactly are they talking about?

Ans. It prescribes by Alice Amsden that the blend of businesses in Asian be taken
as a benchmark for near focal points, and recommended that nation would have a
unique similar favorable circumstances for an item in a part if it's determined. US
and Japan should look at in portions of the yield in the segment.

6. Some writers argue that the development of the electronics industry has been
a”doubled-edged sword.” Explain how this reasoning goes. What are the trends for
the next few years and how will this affect the relative costs and benefits of further
intensification of production in election?

Ans. Becuase technology is also destructive in the sense that it destroys or

undermines things that are valuable like bookshops and print newspapers. Digital
technology has already resulted in a dramatic erosion of personal privacy. And it's
enabling things that are potentially or actually sinister.

7. Discuss the interrelationship between education and the shift that have taken place
in industrial production in Asia over the past two or three decades. How does
comparative advantage fit into this paradigm?

Ans. The relationships between industry and education may take many forms,
including monetary assistance and cooperative interest at all levels. In order to
determine the facts, the Institute initiated a study of the methods, practices, and
 policies of its members in establishing and maintaining good industrial-education
relations.
8. How can state-owned enterprise (SOEs) stifle innovation? In a country with a large
SOE sector like the China or Vietnam, has still been possible to growth rapidly and
to stimulate innovation? How has this happened?

Ans. SOE must targeted measures, which are aimed at increasing managers'
commitment to long-term investment strategies and at reducing corruption and
political interference, albeit complex and difficult to implement can be much more
(positively) impactful on long-run technical progress than the simple privatization
of companies.

9. Is the motivation to migrate from the rural areas to the city generally the same as
the motivation to work overseas? Discuss some of the possible differences in the
variables that explain migration in these two cases.

Ans. No, because we have no definite reason why a family will migrate to a rural
areas jusst like in a work overseas cases that there is a certain reason why a family
or person will migrate to other places.

10. Hobda , Amsden and others with similar views have written about the
industrialization experience of countries in East Asia. What is the basic thrust of
their argument? How does their analysis impact on the current debate about the role
of china in the future growth and development trajectory of the Asian region?

Ans. The index of export Growth for the Asian economies that is, by design heavily
influenced by the changing structure of exports. If a country changes its export
structure in the favor of products for which import growth of the world is growing
rapidly then this index will be larger than when a country export are not responding
to his shift in the world import demand. Almost countries in Asiahave swiftly to
take advantage of markets that are growing rapidly, such as in the electronics,
computers and pharmaceuticals.

11. Discuss the total factor productivity question with respect to the Asian development
economies. In the discussion, review the Krugman-Young evidence with respect to
the impact of total factor productivity on growth and the examine other evidence
that has been presented since their articles were written. If there are differences
between Krugman-Young and more recent evidence, explain why and how these
differences may have arisen.

Ans. Total Factor Productivity, the East Asian Miracle, and the World Production
Frontier. — The post WWII growth of the East Asian Tiger states has stimulated
the discussion about its determinants. Young and Krugman hold that high capital
accumulation rather than gains in efficiency or technological progress has spurred
growth. Nelson and Pack, however, have recently criticized the methods of
measuring technological progress. Applying the nonparametric approach to frontier
production function determination and the Malmquist index of total factor
productivity change, the authors take up this criticism. They calculate productivity
indicators for a sample of 18 American, Asian, and European countries. For the
Tiger states, their results confirm that capital accumulation was the main source of
growth in 1960-1973, whereas they find evidence for an increasing importance of
efficiency improvements for the growth in 1973-1990.
 Chapter 7
INTERNATIONAL TRADE AND INVESTMENTS

1. Explain why assumptions of the Ricardian model of international trade are not
particularly realistic. Why do we study this model if the assumptions are not
realistic?

Ans. The Ricardian model of international trade are not particarly realistic because
this theory considers the units of labor or labor hours required to produce a unit of
a certain commodity. A major point from the Ricardian model us that trade patterns
can be explained by technological differences or labor productivity differences
between countries. Countries need not be competitive relative to the other country
to gain from trade.

2. How does the HOS model modify the Ricardian model? Does this add sufficient
realism to the model?

Ans. According to the Hecksher-Ohlin theorem, countries will specialize and trade
in goods which are relatively abundant. Thus, labor-rich countries will specialize
in the production of labor-intensive products while countries with abundant capital
relative to labor will specialize and trade in commodities that are capital-intensive
in nature. Extensions of this theory can include skill or education-intensive goods
as well.

3. Is there any relationship between the gravity model and the Ricardian and HOS
models? Which model is more realistic in your view?

Ans. The relationship between the Gravity model and the Ricardian and HOS
models is the direction of intra-industry trade is determined in large part by
differences in relative factor endowments while production differentiation and
relative market size determine the volume and composition of international trade.
Ricardian model is the most realistic model because differences in technology
determine comparative advantage.

4. How do you explain the fact that the theories of international trade that we have
discussed stress that more trade takes place when factor endowments are different
with the empirical result that most trade takes place between rich countries with
similar factor endowments?

Ans. Much of the empirical work that has been carried out as well as casual
observation seem to confirm the theoretical implications of the monopolistic
competitive model. Trade between countries with similar factor endowments has
grown às a proportion of total trade.

5. Import-substitution policies are very attractive and have been adopted by many
developing countries. Explain the advantages of such policies.
 Ans. The import-substitution regime, a country tries to stimulate the production of
a different array of domestic goods by levying taxes, licensingn puttjng quotas on
or banning imports. Through this web of restrictions on imports, their
competitiveness in the domestic market is reduced, leaving space for domestic
production. Import-substitution is critically important during the early stages of
development and industrialization.

6. Eventually import-substituton policies were replaced by other policies. What were

these policies and why were they adopted?

Ans. Import-substitution policies were replaced by other policies. The import

substitution is critically important during the early stages of development and
industrialization. During this process, the new industries will have to be subsidized.
Through the protection of infant industries, an industrial base is gradually built up.
This happened in almost all the developing countries. In the developed countries,
the industrialization process took place at about the same time so that there was no
need to protect against products from more advanced countries, although tariff
barriers were imposed on manufactured goods in many countries. Import-
substitution can only take a country so far-particularly a small country.

7. Explain the rationale for dual pricing. What is the difference between dumping and
dual pricing?

Ans. Import-substitution policies were replaced by other policies. The import

substitution is critically important during the early stages of development and
industrialization. During this process, the new industries will have to be subsidized.
Through the protection of infant industries, an industrial base is gradually built up.
This happened in almost all the developing countries. In the developed countries,
the industrialization process took place at about the same time so that there was no
need to protect against products from more advanced countries, although tariff
barriers were imposed on manufactured goods in many countries. Import-
substitution can only take a country so far-particularly a small country.

8. The “Flying Geese” model is based on shifting comparative advantage. Does this
model have its roots in international trade theory or in growth theory? How can
growth theories be adjusted to take the “Flying Geese” paradigm into account?

Ans. Yes the Flying Geese model have its roots in international trade theory or in
growth theory. The Flying Geese is describes the industrialization process of
trading nations. It bears a resemblance to the product cycle theory that has a more
domestic market orientation. The paradigm predicts regional integration and
interdependence among the economies. The countries in the region will depend on
each other for markets for their imports and exports.
9. Discuss the relative costs of an import tariff versus an import ban. What is the
crucial distinction between the two economic effects? Demonstrate graphically.

Ans. An import tariff is a tax for imported goods while an import ban is a ban on a
importation of a certain goods

10. What is the fallacy of composition suggested by William Cline? What are the
empirical results regarding this fallacy? Are they different from the theory? Why?

Ans. The fallacy of composition siggested by William Cline, it is a simulation

model where he assumed that all developing countries follow the example of the
NIE's. With this model, he then derived the export penetration of developing
countries in industrial country markets. He argued that the simulations suggest an
intolerably high level of penetration in developed country markets that would only
pead to further protection by the developed countries. No it is not different from
the theory because they are the same thought.

11. Foreign direct investment has helped many countries to develop in Asia. Still, there
is some reluctance to accept or attract foreign direct investment in certain countries.
Explain their motivation? Have any countries been successful in growing rapidly
without much FDI? If so, how did they do it? Can their experience be replicated?

Ans. The pattern of foreign direct investment in Asia demonstrates how this
relationship has evolved over time.

12. Discuss how the factor price equalization theorem worked in Asia and how did it
relate the “Flying Geese” model?

Ans. Factor price equalization is an economictheory, which states that the prices of
identical factors of production, such as the wage rate, or the rent of capital, will be
equalized across Asia as a result of international trade in commodities. It relates to
flying geese model: One economy, like the first goose in a V - shaped formation,
can lead to other economies toward industrialization.

13. Explain the statement,” The Asian financial crisis was intimately related to foreign
trade”

Ans. The crisis was rooted in several threads of industrial, financial, and monetary
phenomena. In general, many of these relate to the economic strategy of export led
growth that had been adopted across developing East Asian economies in the years
leading up to the crisis. This strategy involves close government co-operation with
manufacturers of export products, including subsidies, favorable financial deals,
and a currency peg to the U.S. dollar to ensure an exchange rate favorable to
exporters.
14. Discuss why there has been such a large increase in intraregional trade in the past
decade, even while there is so much concern about competition from China.

Ans. Intra-regional trade refers to trade which focuses on economic exchange

primarily between countries of the same region or economic zone. In recent years
countries within economic-trade regimes such as ASEAN in Southeast Asia for
example have increased the level of trade and commodity exchange between
themselves which reduces the inflation and tariff barriers associated with foreign
markets resulting in growing prosperity.

15. Discuss the relative advantage of bilateral preferential trade agreements and
multilateral agreements?

Ans. A bilateral preferential trade agreement, also called a clearing trade or side
deal, refers to an agreement between parties or states that aims to keep trade deficits
to a minimum. It varies depending on the type of agreement, scope, and the
countries that are involved in the agreement. While, Multilateral trade agreements
are commerce treaties between three or more nations. The agreements reduce tariffs
and make it easier for businesses to import and export. Since they are among many
countries, they are difficult to negotiate.

16. How does the discussion regarding trade in services relate to innovation
developments in globalization, and in information and computer technology?

Ans. Trade in Services refers to the sale and delivery of an intangible product,
called a service, between a producer and consumer. Trade in services that takes
place between a producer and consumer that are, in legal terms, based in different
countries is called International Trade in Services. In addition, countries with
positive relations between them are able to increasingly unify their economies
through increased investment and trade. Globalization has facilitated this and made
the transition to global markets easier.

17. Explain the meaning of triangular trade. How does this term relate to the trade
relationship between China and other Asian economies?

Ans. Triangular trade or triangle trade is a historical term indicating trade among
three ports or regions. Triangular trade usually evolves when a region has export
commodities that are not required in the region from which its major imports come.
Triangular trade thus provides a method for rectifying trade imbalances between
the above regions. China’s trade is naturally triangular. China naturally exports
manufactures and imports resources given its population.

18. Discuss how the rapid growth in China has impacted on the other countries in Asia
in term of the pattern of international trade.
Ans. IMF says that China’s fast growth in the last decade or so was principally
driven by domestic investment and exports. Domestic consumption has been much
weaker and the savings rate has been very high. But maturing economies tend to
rebalance, transitioning away from investment and goods exports and towards
consumption and services. The fall in investment is partly due to the strategic desire
of the Chinese government to rebalance the economy. China to suck in imports
from its Asian neighbors. But this effect is mainly felt in markets for capital goods,
where China's income elasticity of import demand is highest, and thus by the more
advanced Asian economies. Hence, more and less developed Asian.
 Chapter 8
SAVINGS AND FINANCIAL SYSTEM

1. The importance of income in determining savings has persisted since the time of
Keynes. Why have other theories failed to displace income as the most critical
variable in saving theory?

Ans. In Keynesian model, saving is primarily a function of current income, and

borrowing to sustain income is not considered. This borrowing constraint is relaxed
in income smoothing models. Other theories such as LCH/PIH model do not strictly
apply to the aggregate of all consumers. Thus, it may be useful to enter a variable
which serves as a measure of financial constraints on borrowing, or alternatively
on financial market liberalization.

2. What is Ricardian equivalence and what does it have to do with the level of saving?

Ans. In Ricardian equivalence theory, consumers anticipate the future so if they

receive a tax cut financed by government borrowing they anticipate future taxes
will rise. Therefore, their lifetime income remains unchanged and so consumer
spending remains unchanged. Ricardian equivalence occurs when an increase in the
government deficit leads to an equal increase in private saving and no change in
either the real interest rate or investment

3. Demographic factors seem to have a powerful influence on saving in Asia. Why

should it be so in this developing region and not in others?

Ans. Demographic changes can affect GDP growth through several channels. First,
lower growth in population directly implies reduced labour input. Second, lower
population growth has an indirect potentially negative impact on individual labour
supply insofar as it leads to higher tax rates which reduce the incentive to work.
This change takes place in developing countries because it is difficult for them to
sustain growth and to cope with these changes

4. Why do you think that Harrigan found that the share of agriculture in GDP had a
significant positive effect on saving?

Ans. The Harrigan model found that the share of agriculture in GDP had a
significant positive effect on saving this could be because agricultural income has
a wider variance than non-farm income and hence a higher precautionary motive to
save.

5. The evidence on Asian banking systems shows that there was a significant amount
of financial repression throughout the region. Yet the region grew rapidly in spite
of it. Does this mean that financial repression does not have a negative effect on
economic growth and the allocation of resources?
 Ans. Financial repression describes measures by which governments channel funds
to themselves as a form of debt reduction. It is initially used to point out bad
economic policies that held back the economies in less developed nations. Financial
repression has since been applied to many developed economies and the long-term
damage being done through stimulus and tightened capital rules.

6. What is a “ kerb” market? How do you think it got its name? why did these markets
spring up and thrive in Asia during the period of rapid growth in the 1960s, 1970s,
and 1980s?

Ans. The Kerb market developed outside the formal financial system to mobilize
and direct credit to those sectors not effectively serviced by the formal financial
and banking system. The origins of curb trading trace back to curbstone brokers
who were known to conduct trading on the actual curbs of streets in certain financial
districts. These brokers were common during the 1800s and early 1900s, with the
most famous curb market residing on Broad Street in Manhattan's financial district.

7. Contrast the financial liberalization experience of Hong Kong and Singapore with
that of India and the other countries of South Asia.

Ans. In parts of East Asia, particularly in Hong Kong and to a lesser extent in
Singapore, the banking system was not encumbered by too many regulations and
restrictions while financial liberalization was not as great handicap in East Asia as
it was in South Asia, where the other policies of openness, competitiveness in
exports, and more liberal industrial policies were not followed.

8. Explain why certain variables, such as the ratio of money supply to GDP, are used
to measure the degree of financial repression. When liberalization takes place, what
should happen to these variables? Why?

Ans. The various controls resulting in a financial system that did not allocate credit
to the public, the banking sector played a smaller role than it could have in more
competitive environment. Such repressed cause low or negative real interest and a
low ratio of money assets to GDP/GNP. In this case, financial liberalization is
designed to remove all the restriction that characterized financial repression.
Competitive forces should be allowed to operate in the banking system to economic
efficiency both domestic and international bank

9. Explain why financial liberalization may not necessarily result in an acceleration

of economic growth and increase economic efficiency?
Ans. When financial liberalization had been in full swing. Interest rates were being
liberalized and restrictions on the banks dismantled. The flow of capital into the
country was proceeding vigorously as capital controls were being dismantled. Thus,
banking and financial system had not adapted well enough from an institutional
point of view.
10. What went wrong with the financial liberalization measures taken in Southeast and
East Asia? Refer to particular country examples.

Ans. In some case, financial repression was not as great a handicap in East Asia as
it was in South Asia, where the policies of openness, competitiveness in exports,
and more liberal industrial policies were not followed. In Southeast Asia, financial
repression was not at extensive as in South Asia, and more private-sector
involvement was permitted. Also, fewer changes were implemented and the
structure of the financial system remained repressed.

11. Explain what the terms “adverse selection,””moral hazard,” and “free rider” mean
when speaking of the Asian financial crisis?

Ans. The term adverse selection means the buyers have better information than
sellers, and this can distort the usual market process. Moral hazard is a situation in
which one party gets involved in a risky event knowing that it is protected against
the risk and the other party will incur the cost while Free rider is an inefficient
distribution of goods or services that occurs when some individuals are allowed to
consume more than their fair share of the shared resource or pay less than their fair
share of the costs.

12. Which AMCs in the crisis- affected countries were most effective, and why?

Ans. All the countries established new agencies to deal with NPLs, generically
called Asset management companies (AMCs). The most progress was made in
Korea and the least in Indonesia and the Philippines. Korea and Malaysia were the
most successful in disposing of the asset 60percent and 100percent respectively.
The primary emphasis was on the banking system and devising methods to dispose
of nonperforming loans

13. Why is there so much informal finance in the Asian countries but not in the
industrial countries?

Ans. There so much informal finance in Asian countries because those involved in
informal finance are generally poor and unable to accumulate much in the way of
saving, their asset are primarily in goods and cash compared to those industrial
countries. Therefore, to help the poor to continue to make strides in raising their
standards of living, monetary policy should focus on maintaining a stable price
level as its primary objective

14. Explain how a Rosca works using a simple example with money values.

Ans. The Rosca can be organized by a group of friends or by an outside manager.

The way in whichRosca is distributed depends on the agreement. In bidding, the
person taking the kitty would offer the offer the largest discount, which serves as
proxy for an interest rate, and also gives some return to member. This help to
 resolve problems by organizing people who have no access to borrowing from
formal sector.

15. What is likely to happen to demand for informal finance when an economy takes a
downturn, or falls into recession, and unemployment increase?

Ans. When an economy takes a downturn or falls into recession, the commercial
banks have not been willing to share the risk of credit guarantees, primarily because
it is difficult to measure the risk involved and then to determine the cost of a
scheme. Since, the government will finance the losses and the problem of moral
hard would arise.

16. In question 15, what will happen to the spread between interest in the formal sector
and the “kerb” market rate of interest ?

Ans. In many developing countries, there significant sectors of the population that
are unable to obtain from institutions in the formal financial sector, such as banks
and credit unions. As a result, informal financial institutions have emerged that do
not fall under supervisory umbrella of the central bank. Furthermore, consumer and
other borrowers not targeted had rely on "kerb" market.

17. Why are the Asian economies in a better position to deal with the global financial
crisis of 2008 and 2009 than they were in the 1997 Asian crisis?

Ans. During the financial crisis of 2008 and 2009, the Asian financial markets were
relatively stable. Many reforms that had been suggested following the 1997 Asian
financial crisis had been adopted and bank balance sheets were in better shape.
Exchange rates, while still loosely tied to the U.S dollar, were also more flexible
than they were before the 1997 financial crisis. Banks and other financial
institutions were well aware of the risk of assuming a secure dollar link when
making overseas borrowing commitments.

18. Why aren’t there more banks like the Grameen Bank and Bank Gadang Bali serving
residents of the countries in the Asian region?

Ans. The GB and Bank Gadang has depended and continues to depend on
donations, and it takes very few of deposit. Although GB may get its loans repaid,
it is still not self-financing but depends on donations for its operating.