EC3021 Development Economics Assignment-City, University of London

Instructions to students: All questions are compulsory.

Dictionaries are not allowed.

TASK: EC3021 Development Economics Assignment

Question 1

The government of a poor developing country fears that a political upheaval will occur unless the GDP growth rate is at least 4 percent per annum. The capital-output ratio and the savings rate are projected to be 5.0 and 0.14, respectively.

a)Which model represents the process of growth using a fixed capital-output ratio? What does the capital-output ratio represent? Discuss the main assumption underlying the production function of this model. (10 marks)

b)Show that a 4 percent growth target cannot be achieved under these circumstances. (10 marks)

c)Taking the saving rate as given and a depreciation rate of 10 percent, what capital-output ratio would be required to achieve the 4 percent growth target? (5 marks)

Question 2

A fictitious society is composed of only 3 individuals.

EC3021 Development Economics

a)Draw the corresponding Lorenz curve of the income distribution. (5 marks)

b)Calculate the Gini coefficient of income inequality. (5 marks)

c)What will happen to the Gini coefficient that you calculated above if every individual receives a gift of £100? (5 marks)

d)What happens to the Gini coefficient if individual 2 gives a gift of 100 to the richest individual? (5 marks)

e)What happens to the Gini coefficient if the richest individual gives a gift of 100 to the poorest individual? (5 marks)

Question 3: EC3021 Development Economics Assignment-City, University of London

Discuss in a concise and clear manner different reasons why wealth inequalities may affect economic development. Give at least three different channels (15 marks)

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