Development Economics

• A. An increase in a country's total GDP over time
• B. A broader improvement in living standards, including health, education, and income distribution, alongside rising output ✓
• C. The expansion of exports as a share of national output
• D. A rise in the stock market index over a decade

Why: Economic development refers to multidimensional improvements in well-being, such as health, education, and equity, while economic growth refers narrowly to increases in output such as GDP. A country can grow without developing if gains are concentrated among a few.

• A. Nominal GDP
• B. Gross national savings rate
• C. GDP per capita at purchasing power parity (PPP) ✓
• D. Current account balance

Why: GDP per capita in PPP terms converts national incomes using relative price levels, so it better reflects what people can actually buy. Nominal GDP ignores differences in the cost of living across countries.

• A. Income, political freedom, and military spending
• B. Life expectancy, education, and standard of living (income) ✓
• C. Literacy, employment, and inflation
• D. Trade openness, savings, and investment

Why: The HDI, published by the UNDP, measures health via life expectancy at birth, education via schooling indicators, and standard of living via GNI per capita. It was designed to capture development beyond income alone.

• A. Demographic transition
• B. Vicious cycle of poverty ✓
• C. Comparative advantage
• D. Structural adjustment

Why: The vicious cycle of poverty, associated with development economists such as Ragnar Nurkse, describes how poverty traps itself: limited income restricts saving and investment, which keeps productivity and income low.

• A. A high share of employment in agriculture and a large share of the population living on low incomes ✓
• B. A predominantly service-based economy with high-tech exports
• C. Low population growth and an aging workforce
• D. High levels of foreign aid as a share of GDP for all citizens

Why: Low-income economies typically depend heavily on agriculture, have low productivity, and have large shares of their population in poverty. Many also have limited industrial and service sectors compared with high-income economies.

• A. $1.90 per person per day (2011 PPP) ✓
• B. $10 per person per day (nominal)
• C. Half of the national median income
• D. The minimum wage in each country

Why: The World Bank's international extreme poverty line has been set at $1.90 per person per day in 2011 purchasing power parity terms, later updated to $2.15 in 2017 PPP. Using PPP adjusts for differences in price levels across countries, allowing comparison.

• A. From -1 to 1, where 0 means negative growth
• B. From 0 to 1, where 0 means perfect equality and 1 means perfect inequality ✓
• C. From 0 to 100, where 100 means perfect equality
• D. From 1 to 10, where 1 means maximum inequality

Why: The Gini coefficient is bounded between 0 and 1. A value of 0 indicates that everyone has exactly the same income or consumption, while a value of 1 indicates that one person holds all the income. (Some sources express it on a 0-100 scale, but 0-1 is the standard.)

• A. Headcount ratio
• B. Poverty gap index ✓
• C. Mean household size
• D. Gross domestic product per capita

Why: The headcount ratio only counts the share of people below the poverty line. The poverty gap index measures the average shortfall of the poor from the poverty line, expressed as a share of the line, so it captures depth of poverty as well as incidence.

• A. The rate of population growth over time
• B. The cumulative share of income received by cumulative shares of the population, ordered from poorest to richest ✓
• C. The relationship between inflation and unemployment
• D. The distribution of land ownership only

Why: The Lorenz curve plots the cumulative percentage of total income (or consumption) against the cumulative percentage of the population, ranking people from poorest to richest. The further the curve bows below the diagonal line of perfect equality, the greater the inequality, and the Gini coefficient is derived from the area between the two.

• A. National accounts data are never collected by governments
• B. Household surveys directly capture how income or consumption is distributed across households, while GDP averages hide distribution ✓
• C. Household surveys always cover the entire population including the rich
• D. National accounts only measure agricultural output

Why: GDP per capita is an average and says nothing about how income is spread across people. Household surveys record the income or consumption of individual households, making it possible to measure poverty rates and inequality directly.

• A. The total financial wealth held by a country's citizens
• B. The knowledge, skills, and health that individuals accumulate and that make them more productive ✓
• C. The number of factories and machines used in production
• D. The amount of foreign aid received by a developing country

Why: Human capital refers to the productive capacities embodied in people, primarily education, training, skills, and health. Investing in these raises worker productivity and income, which is why it is central to development economics.

• A. Schools charge no fees and provide free meals
• B. Families need children to work to supplement household income ✓
• C. Parents place no value on literacy or numeracy
• D. Governments require all children to remain enrolled until age 18

Why: Opportunity costs and household poverty often force families to pull children out of school to work, whether on farms, in markets, or at home. Direct school costs such as uniforms and fees also contribute.

• A. The money governments earn from taxing educational institutions
• B. The percentage increase in earnings associated with an additional year of schooling ✓
• C. The number of graduates a university produces each year
• D. The total government spending on schools as a share of GDP

Why: Returns to education measure how much extra income an individual gains from each additional year of schooling. Mincer-style estimates typically find substantial positive returns, which helps explain private demand for education.

• A. Primary education is always more expensive than secondary education
• B. Educated citizens generate benefits for others, such as lower fertility, better health practices, and civic participation, that individuals do not capture themselves ✓
• C. Private schools provide lower-quality instruction than public schools
• D. Employers are legally required to pay educated workers less

Why: Positive externalities mean that some benefits of education spill over to society, including improved public health, reduced child mortality, and stronger institutions. Because individuals do not receive these benefits privately, the social return is higher than the private return, which can justify public subsidies.

• A. Conditional cash transfer programs that pay families to keep children in school ✓
• B. Abolishing all public spending on education
• C. Requiring families to pay higher school fees
• D. Eliminating teacher training programs

Why: Conditional cash transfers, such as Mexico's Progresa/Oportunidades and Brazil's Bolsa Familia, provide money to households on the condition that children attend school and receive health checkups. They reduce the opportunity cost of schooling and have been shown to raise enrollment and attendance.

• A. Health has no measurable effect on economic growth.
• B. Better health tends to raise labor productivity and economic growth, while growth can also improve health outcomes. ✓
• C. Economic growth always worsens population health.
• D. Health only matters for consumption, not for production.

Why: Healthier workers are more productive, and higher incomes allow investment in healthcare and nutrition, creating a two-way relationship between health and growth.

• A. Demographic dividend
• B. Health poverty trap ✓
• C. Lewis turning point
• D. Engel's law

Why: A health poverty trap describes how poor health reduces income and productivity, which in turn limits spending on health, keeping both locked at low levels.

• A. Gross domestic product per capita
• B. Life expectancy at birth ✓
• C. Literacy rate
• D. Inflation rate

Why: Life expectancy at birth summarizes mortality conditions across all age groups and is widely used as a population-level health indicator.

• A. It always reduces savings and investment.
• B. It can lower fertility rates over time and increase the share of working-age people, potentially boosting savings and growth. ✓
• C. It has no effect on the age structure of the population.
• D. It increases the dependency ratio permanently.

Why: When fewer children die, families tend to have fewer births over time, which can shift the age structure toward working-age adults and support a demographic dividend.

• A. Reducing spending on clean water and sanitation
• B. Vaccination programs against infectious diseases ✓
• C. Eliminating all primary education
• D. Abolishing nutrition programs for pregnant women

Why: Vaccination programs reduce illness and death from infectious diseases, improving workforce health and school attendance, which supports long-term growth.

• A. Infrastructure
• B. Institutions ✓
• C. Endowments
• D. Remittances

Why: Institutions are the humanly devised rules, both formal (laws, constitutions) and informal (norms, customs), that structure incentives and interactions. They are central to development economics because they shape how resources are allocated and how economies grow.

• A. Extractive political and economic institutions
• B. Inclusive political and economic institutions ✓
• C. Centrally planned institutions with state ownership
• D. Informal institutions based solely on kinship networks

Why: Acemoglu, Johnson, and Robinson argue that inclusive institutions, which broadly distribute political power and secure property rights and economic opportunities, encourage investment and innovation. Extractive institutions concentrate benefits among elites and tend to stifle growth.

• A. The government's ability to collect taxes efficiently
• B. Laws being applied equally and predictably, constraining both citizens and authorities ✓
• C. The military's control over civilian politics
• D. The number of laws a country has passed

Why: The rule of law means that laws are clear, publicly known, applied consistently, and bind the government as well as private actors. It reduces uncertainty and protects property and contracts, which supports investment and growth.

• A. A central bank adjusting interest rates
• B. A civil servant demanding bribes to approve a business license ✓
• C. A country signing a free trade agreement
• D. Households saving money in a bank

Why: Corruption is the abuse of public office for private gain. Bribery to obtain a license is a classic example, as it diverts resources, raises costs for businesses, and undermines trust in institutions.

• A. Governments maximizing the size of the public sector
• B. Effective, transparent, accountable, and participatory management of public affairs ✓
• C. Governments avoiding all regulation of markets
• D. Leaders remaining in power for as long as possible

Why: Good governance involves institutions that deliver public services effectively, operate transparently, hold officials accountable, and allow citizen participation. These qualities are widely viewed as supporting sustainable development.

• A. Loans that must be repaid at market interest rates
• B. Transfers of resources from donor countries to recipient countries, often as grants or concessional loans ✓
• C. Private investment by multinational corporations in local factories
• D. Tariffs imposed by developing countries on imported goods

Why: Foreign aid consists of official transfers of resources from governments or international agencies to developing countries, typically as grants or low-interest (concessional) loans intended to promote development or welfare.

• A. Short-term purchases of government bonds by foreign investors
• B. Donations from charities to local communities
• C. Long-term investment by a firm in one country that establishes lasting control or a significant stake in an enterprise in another country ✓
• D. Loans from the World Bank to national governments

Why: FDI involves a firm or individual acquiring a lasting interest and managerial influence in a foreign business, such as building a factory or buying a substantial stake in a local company. Portfolio investment in bonds or stocks is not FDI because it lacks this control element.

• A. Produce every good domestically to avoid dependence on others
• B. Specialize in producing goods for which they have the lowest opportunity cost and trade for the rest ✓
• C. Restrict imports to protect domestic industries from competition
• D. Export only raw materials and never manufactured goods

Why: Comparative advantage holds that countries gain from trade by specializing where their opportunity cost of production is lowest, even if they are not absolutely the most efficient producer. Specialization and trade then raise total output and welfare for all participants.

• A. To make imported goods cheaper for consumers
• B. To tax imported goods, raising their price relative to domestic goods ✓
• C. To provide grants to exporting firms
• D. To eliminate all trade between two countries

Why: A tariff is a tax on imports. By raising the price of foreign goods, it makes domestic producers more competitive and generates government revenue, though it typically raises prices for consumers.

• A. Capital account balance
• B. Trade balance ✓
• C. Fiscal deficit
• D. Terms of trade

Why: The trade balance is the difference between the value of a country's exports and imports. A positive balance is a surplus and a negative balance is a deficit. Terms of trade measure the ratio of export prices to import prices, which is a different concept.

• A. To provide large corporate loans to multinational firms
• B. To provide small-scale financial services to low-income individuals and small businesses who lack access to traditional banking ✓
• C. To replace government social welfare programs entirely
• D. To finance national infrastructure projects through foreign bonds

Why: Microfinance aims to extend small loans, savings, and other financial services to people excluded from formal banking, such as poor households and microenterprises, helping them invest, smooth consumption, and build assets.

• A. The government freezing a bank account for tax violations
• B. The inability of individuals or groups to access affordable and appropriate formal financial services ✓
• C. A bank choosing to close its branches in wealthy neighborhoods
• D. Households deliberately refusing to save money

Why: Financial exclusion describes the lack of access to useful, affordable financial products such as credit, savings, insurance, and payment services, which often affects poor, rural, and informal-sector populations.

• A. Borrowers receive loans without any repayment obligation
• B. Borrowers form small groups that are jointly liable for each other's loans, encouraging peer monitoring ✓
• C. Only the wealthiest member of a village may borrow
• D. Loans are guaranteed by the national government

Why: Under joint liability group lending, members guarantee one another's repayment, which reduces lender risk and uses social pressure and peer monitoring in place of physical collateral.

• A. They generally prefer informal moneylenders for cultural reasons only
• B. Lenders face high information costs and risks, and the poor often lack collateral and documented credit histories ✓
• C. Formal banks are legally prohibited from lending to anyone earning less than a national minimum wage
• D. The poor have no need for credit because they consume only what they produce

Why: Information asymmetry, high transaction costs for small loans, and a lack of collateral or credit records make lending to the poor risky and expensive for formal institutions, leaving a gap that microfinance attempts to fill.

• A. It has been shown to eliminate poverty entirely in every country
• B. Some institutions charge high interest rates and some borrowers may fall into over-indebtedness ✓
• C. It has no effect on any household outcomes whatsoever
• D. It is only offered in developed economies

Why: Critics point out that high interest rates and multiple borrowing can lead to over-indebtedness, and that evidence on poverty reduction is mixed, even though microfinance has benefits for some borrowers.