Growth and Development Economics – Quiz 1A

Lahore School of Economics

Spring Semester, 2013

Development and Growth Economics

BSc IV – Section C

Quiz 1A – Total Points: 50 – Suggested solutions

Instructions: Answer all questions in the spaces provided. For full marks, make sure you write
all relevant points and formulate coherent and concrete answers. Pencils, pens, rulers, etc.
cannot be shared and cell phones cannot be used during the session.

Question 1

Using the definition of development as explained by Amartya Sen’s “capability approach”,

explain in detail the core values of development and the objectives of development. (15
points)

Amartya Sen’s “capability to function” approach should be quoted here. He said that
development is more concerned with enhancing the lives we lead and the freedoms we enjoy.
What matters most is not what the person HAS but what a person IS and/or CAN BE. In general,
human well-being is not about what commodities are available to them, but rather it’s about
their uses, that is, “what people can do or do with commodities of given characteristics that
they come to possess or control”, termed as ‘functioning’. People should have the capabilities to
‘function’ and do, or at some point in life, be able to do what they want to do with their life and
the commodities they have (freedom of choice). One should be able to control his/her own life
and this is the central aspect of most understandings of human well-being.

This should be coupled with being able to meet basic needs of life, gain self-esteem and get
freedom from servitude. These are also termed as CORE values of development

Hence, objectives of development are not only to increase the availability and distribution of
food, health, protection, etc. but also to consistently improve the standard of living by
providing better quality of jobs, education and expanding the range of economic and social
choices available.

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 Growth and Development Economics – Quiz 1A

Question 2

(A) How would you explain the differences in the first two columns (Income per capital and
PPP per capita) of the following table for different income groups, countries and regions?
(B) Elaborate on the similarities and differences among various income groups focusing on
‘health indicators’ only. (10 points for each part)

(A) Students should talk about the difference between conventional measures of exchange rates and
PPP method of determining the exchange rates.

The (conventional) market exchange rate does not include goods that cannot be internationally
traded. For instance, many services (e.g., haircuts) and more than a few finished goods tend not to
be traded internationally. Such items contribute towards ‘cost of living’ within different countries.
This complicates the task of comparing per-capita GDP in one country with that of another country,
as is required for the systematic analysis of economic development. Thus, converting the income in
one country to US dollars using the market exchange rate gives distorted numbers – the market
exchange rate is not a good reflection of the purchasing power of a given currency in another
country as the former doesn’t include all the goods and services used and consumed in a country.
Since $ is a powerful currency, the conventional exchange rates would UNDERESTIMATE the cost of
living or purchasing power of local currency in domestic currency terms. PPP-version corrects for
this distortion as it calculates GNI using a common set of international prices for all goods and
services (not only the traded ones), to provide more accurate comparison of living standards. So we
can see the differences for developing countries as PPP method gives a relatively higher amount of

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 Growth and Development Economics – Quiz 1A

GNI discounting the overvalued US$ (due to high demand of US$ as trade is done mostly with this
currency).

(B) This is a student-specific answer. For Life expectancy, Prevalence of Undernourishment and
Mortality rates (Under 5), students should distinguish between the values of high, middle and low
income countries. Their main focus should be on the diversity between developing countries.

Question 3

What makes the Lewis model a “development” model rather than an “economic growth” model?
What insights on development can be derived from the model? How relevant do you think it is for
developing nations like Pakistan? (15 points)

The basic point here is that Lewis is addressing structural change, rather than simply the rate of growth,
and starts with a characterization of a poor country rather than an abstract economy.

Students should make use of the following diagram and write about the insights derived. It could be
stated that how a country can develop from a structural change (from agricultural to manufacturing
sector) and how can manufacturing sector continue to expand making use of its own profits and transfer
of labor from overpopulated rural sector till the ‘turning point’ (LA) from traditional sector. Students can
also mention criticisms on the model while talking about the insights.

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 Growth and Development Economics – Quiz 1A

As far its relevance for a country like Pakistan is concerned, there are problems. For instance, it would
be difficult to transform the labor of the rural sector to be used in the manufacturing sector.

It is possible that entire profits are not reinvested by the local capitalists thereby slowing the expansion
rate of manufacturing sector and delaying the process of structural change.

Moreover, there is already unemployment in the modern sector of Pakistan and hence, expansion of
this sector would not require labor from the rural sector but industrialists would rather recruit surplus
labor in the manufacturing sector.

Lastly, institutional factors always count. The weaker and the more inefficient the institutions are, the
more inevitable the underdevelopment trap.

Please note that students need not necessarily mention all the points above. Other points will be
taken into account

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