INTRUZO. PAMELA MAE C.

BS - ACCOUNTANCY
1. Most development economists now seem to agree that the level and rate of growth of GNP and per capita
income do not provide sufficient measures of a country’s development. What is the essence of their argument?
Give some examples. (15points)

- We know that the word development is a vast term that encompasses in itself the various indicators of
development and these include the following:

*Increase in per capita income, GDP ( Gross Domestic Product) and GNI (Gross National Income)
*Standard of living of people or purchasing power
*The levels of literacy, employment and income inequality
*Health facilities enjoyed by the general population
*Number of people lying below the poverty line and measures taken by the government to eradicate poverty
*Status of women and children in the society and various other indicators

- Example:

The country India. The country showed a positive increase in GDP during the period 1960 to 2000 from 3.6
percent to 6.1 percent respectively. The rate of growth was higher than the employment growth that was stable
at 2 percent per annum.

This era has been called the era of jobless growth. It is not called development because there is an increase
income with unemployment. This means that, the economy must have produced more goods and service that
were bought only by the rich class and unaffordable by major chunk of the population. This era must have
increased the income inequality level too.

The above example clears that the rate of increase in GDP or per capita income or GNI does not indicate
development in true sense. We need to consider other factors also.

2. What is meant by absolute poverty? What measures of income poverty are favored by development economists?
How do these measures differ from the UNDP’s Multidimensional Poverty Index? Why should we be concerned
with the meas- urement of poverty in developing nations? (25 points)

- Absolute poverty is the situation in which the poor id barely able to meet the subsistence essential of food,
clothing, shelter and basic health care in order to ensure continued survival. It is generally expressed as a
specific minimum level of income that is necessary to maintain the subsistence level.

The key thing to understand about this first component is that the best poverty line to use in measuring poverty
among a given population is not a scientific question, but rather a question of social perceptions among that
population as to what it means to be poor. After all, the whole notion of “poverty” essentially means, “having a
living standard that is unacceptably low in the eyes of the society in which a person or household lives.” But that
definition should make two things clear: first, that using a particular poverty line to measure poverty among a
given population only makes sense to the extent that population shares a common perception of the dividing line
between poverty and non-poverty, and second that the right poverty line to use among a given population will
depend heavily on prevailing living standards among that population.

Development economists believe that a desirable poverty measure should satisfy some basic axioms or
principles: the anonymity, population dependence, monotonicity and distributional sensitivity Based on this, a
well-accepted poverty measure is the Foster-Greer-Thorbecke (FGT) index often called the Pa class of poverty
measures.
 Another widely used poverty measure used by the World Bank and other agencies is poverty measure because
of its sensitivity to the depth and severity of poverty. Multidimensional Poverty Index incorporates three
dimensions at tile household level: hearth, education and wealth. It provides a new and fundamentally important
way to measure poverty, to help understand how poverty levels differ across and within countries.

3. In the text, when we examined statistics from a wide range of developing countries. We found that growth does
not guarantee poverty reduction; while higher income is clearly associated with less poverty, economies can
even reach upper-middle-income status but continue to struggle with a quite high incidence of extreme poverty.
What does this tell us about the importance of the character of a nation’s growth process and about its
institutional structure? (25 points)

- Growth can generate virtuous circles of prosperity and opportunity. Strong growth and employment
opportunities improve incentives for parents to invest in their children’s education by sending them to school.
This may lead to the emergence of a strong and growing group of entrepreneurs, which should generate pressure
for improved governance. Strong economic growth therefore advances human development, which, in turn,
promotes economic growth. But under different conditions, similar rates of growth can have very different
effects on poverty, the employment prospects of the poor and broader indicators of human development. The
extent to which growth reduces poverty depends on the degree to which the poor participate in the growth
process and share in its proceeds. Thus, both the pace and pattern of growth matter for reducing poverty. A
successful strategy of poverty reduction must have at its core measures to promote rapid and sustained economic
growth. The challenge for policy is to combine growth promoting policies with policies that allow the poor to
participate fully in the opportunities unleashed and so contribute to that growth. This includes policies to make
labour markets work better, remove gender inequalities and increase financial inclusion.

4. What are the principale economic characteristics of high-poverty groups? What do these characteris-tics tell us
about the possible nature of a poverty- focused development strategy? (15 points)

- The single most important economic characteristic of high-poverty groups is lack of gainful employment; it is
the same everywhere, from the richest nations to the poorest nations. While the characteristic is the same, the
causes are different. but they have one thing in common, bad government.

In developed nations government causes unemployment with minimum wage laws and welfare. Minimum wage
laws prevent less desirable employees from ever getting employment thereby keeping them from ever becoming
a desirable employee. Welfare keeps less desirable employees from attempting to become employed by paying
them to be unemployed. The solution is simple; eliminate the minimum wage and welfare.

High Povery Groups are usually beings which behavior is dictacted by (1) degree of instability of the
environment which decreases the motivation to delay gratification because it is uncertain whether these
gratifications will pay off (2) degree of dicatatorship and corruption because the more one shines and achieves
and thereby exceeding the average joe, the higher the risk it might be stolen from him thus decreasing the value
of suffering and delaying gratification which is necessary to achieve a higher purpose in life.
5. “The major determinant of a country’s income distribution is its distribution of productive and income-earning
assets.” Explain the meaning of this statement, giving examples of different kinds of productive and income-
earning assets. (20 points)

- income earning assets: ones that depict the ownership of land; physical capital; human capital; and financial
resources that generate income for owners.

The major cause of income inequality in most developing countries is the unequal and highly concentrated
patterns of asset ownership in these countries.

The government should adopt policies for redistribution such as land reforms; transfer of annual savings and
investments to low-income groups; more access of education and health facilities for girls; progressive income
taxation.