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Summary for the course ''Development economics''. This summary was written in order to study for the final. Everything you need to know is available in this summary. Advice: this summary alone will not be enough, the tutorials are as important and ...
,Week 1
Main issues of poverty and development
Poverty line (PL): a critical threshold of income, consumption or access to goods and services. Below
this line people are declared as poor.
Examples:
- USA PL: minimum budget for food * 3. Hence below this number you are considered poor.
- Indian PL: minimum consumption of calories.
Concerns of poverty lines:
1. What to measure?
→ Measure income and not consumption baskets.
2. Absolute or relative poverty lines?
→ Absolute. Regardless where we live, we need adequate levels of food, clothing and
shelter. Adequate is relative to where we live. (TV, car, university education)
→ Poverty lines vary from country to country.
3. Temporary or chronic?
→ Both. Important to make a clear distinction between the two.
4. Households or individuals?
→ Household data. However, these can have problems too. (male vs. female, children etc.)
Poverty measures:
1. Head count (HC): number of people below the PL.
y = expenditure, i = individuals, p = poverty line.
2. Head count ratio (HCR): % of people below the PL.
Problems:
- The measures do not capture to what extent people are below or above the line.
- People very close the PL experience bias policy .
3. Poverty gap ratio (PGR):
, m = the mean income.
→ Income needed to get all poor people to the poverty line / income of society.
Problems:
- The PGR can be very misleading in rich and unequal societies. Since the denominator is
very small in that case so it seems that the PGR is low. But in reality, there are a lot of poor
people.
4. The income gap ratio (IGR):
→ Total income required to bring all poor people to the poverty line. (HC = headcount)
→ It shows the acuteness of poverty, since it measures it relative to total income needed to
make poverty go away.
3
,Poverty is more than low income or low consumption:
- Poor health
- Poor education
- Poor quality of life
- Lack of capabilities to become one’s full potential (Amartya Sen, philosopher)
Two alternative views:
1. Jeff Sach: countries are pore because of endemic problems (=weather, geography etc.).
→ unproductive → no financials to deal with these endemic problems.
Solution: foreign aid to break this trap.
2. William Easterly: aid does not work.
- It prevents people from searching their own solutions.
- It undermines local institutions.
- Corruption.
→ Poverty trap does not exist!
→ Let free markets do their thing since aid does not work.
Jeffrey Sachs William Easterly
4
, Week 2 - Empirical methods (identification)
Correlation fallacy
Examples:
1. Observation I: when dogs chase a car, barking at the cars won’t stop them
→ ‘’Does barking prevent cars from stopping?’’ → no
2. Observation II: when people use umbrellas, it rains
→ ‘’Do umbrellas make it rain?’’ → no
3. Observation III: basketball players are tall
→ ‘’Does basketball make you taller?’’, ‘’Do tall people play basketball?’’ → could be both
➔ Correlation fallacy: the logical mistake of believing that because two events occur together,
there is a cause-and-effect relationship.
The problem of causal inference:
Setting: What is the effect of a study program on future earnings?
Only way of identifying a causal effect, is by comparing the actual effect with a counterfactual.
Counterfactual:
- How much money would people who went to school have made in the absence of education?
- How much money would people who did not went to school have made when they would have
gone to school?
However, comparing individuals who went to school with those who did not, will not give a reliable
estimate of the program’s impact.
Reasons:
- Unobserved factors that influence income as well
- Self-selection bias: people who choose to go to school differ from those who did not choose that.
Example: text books and grades
The experiment:
Experiment: compare the participants which received text books with a
similar group that did not receive the text books for exogenous reasons
(=comparison group).
Groups: they are similar. In absence of the experiment, they both would
have had a same outcome and way to that outcome.
→Treatment group vs. Comparison group
YiT : average grades in school of the treatment group.
YiC : average grades in school of the comparison group.
Yi : actual observed grades of children in school ‘i’.
YiT - YiC : effect on average grades of having textbooks in school ‘i’.
However, we cannot observe both situations play out in the same school ‘i’. Every school has two
potential outcomes, but only one can be observed.
5
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