CHAPTER 1

1. Suppose your friend is strong on defense and insists that we must bolster our national
defense, whatever the cost. How can you use economic logic to make him or her aware of
the opportunity cost associated with his or her objective?
2. Unemployment imposes serious hardship on out-of-work individuals and their families.
What are the costs of unemployment to society as a whole? (Keep in mind the production
possibilities curve).
3. Why, in a rich nation, it is important that we fully use our resources and technology to
maximize our nation’s output? Is it only the level of total output that is important, or are
the types of output that we produce also .important? Do you think that the distribution of
this output is just as its total amount?
4. Do you think our nation’s output should be distributed according to income or according
to some other standard (such as basic human need)?
5. Equilibrium implies that quantity demanded equals quantity supplied at a particular price.
Must consumers and producers actually sit down to discuss and decide on an equilibrium
market price? Is a farmers’ market or flea market a competitive market? Why or why
not?
6. Does the efficiency of the price mechanism ensure that our market-based economy is an
equitable one? Why or why not?
7. The following schedules are for bushels of apples in a local market. Graph the supply and
demand curves. What are the equilibrium price and quantity?
PRICE QUANTITY DEMANDED QUANTITY SUPPLIED
$20 200 1000
18 400 600
16 600 400
14 800 400
12 1000 200
Now assume that an early freeze has decreases the apple harvest, and the new supply
schedule is as follows. Has supply increased or decreased? What are the new equilibrium
price and quantity? (Note that the demand curve is unchanged)
 PRICE QUANTITY SUPPLIED
$20 600
18 400
16 200
14 0

8. Go to the web site at http://netec.mcc.ac.uk/JokEc, find a good economics joke, and share
it with your teacher!
9. One additional source that may be useful if you need to do a research on economics
topics is the web site of the British periodical, the Economist. It’s articles on various
topics can usually be understood by beginning students of economics. You can find this
site at http://www.economist.com

CHAPTER 2
OVERVIEW OF DEVELOPMENT ECONOMICS
CHAPTER 3

GROWTH AND THE ASIAN EXPERIENCE

Review Questions:
1. The Harrod-Domar growth model is based on the fundamental Keynesian relationship
between consumption and income. How does that fit into the Harrod-Domar model?
Answer: The Harrod-Domar model is a classical Keynesian model of economic growth
that is used in economics to explain an economy's growth rate in terms of the level of
saving and productivity of capital. In the book it states that this model begins with the
assumption that saving is a constant proportion of income. The relationship fits the
Harrod-Domar model for this model emphasize the importance of saving and investment
in achieving higher growth and the efficiency with which capital is employed.

2. If the marginal propensity to consume in the Keynesian model increases (b in the equation
C=a+bY), what happens to the saving rate? What does this say about countries that save a
large proportion of income relative to those that save less in terms of growth in the
Harrod-Domar Model?
Answer:
3. Suppose the efficiency of the economy improves in the sense that more output is
generated with the same capital stock. What will this do to the growth rate in the Harrod-
Domar Model?
Answer:
4. What does the population growth adjustment to the Harrod-Domar model do the growth
path of income?
Answer:
5. How would the growth of Europe following the bubonic plague episodes in the thirteenth
to seventeenth centuries have been affected if Europe had been following the growth path
described by the Harrod-Domar model. Do you think this actually happened? If not, why
not?
Answer:
6. What are the main difference between the Solow and the Harrod-Domar Models? Is the
Solow model more realistic? How does it introduce more realism into its assumptions?
Answer:
 The difference between the Solow and Harrod-Domar Model is that, in Harrod-
Domar model it doesn’t consider the law of diminishing returns to capital which
can take effect as growth proceeds. They also put emphasis on the assumption that
saving is a constant proportion of income while in Solow model it incorporates
the law of diminishing returns to factors of production. Also Solow model starts
from production function, rather than saving function.
 For me, Solow model is more realistic because growth of an economy doesn’t
only depend on savings. Economies output depends crucially on initial
endowments of labor and capital which work better to produce the economy’s
level of output.
 Assumptions that were introduce under Solow model was way more connected to
what we are really experiencing right now. It better explained the connection of
income and saving rather than in Harrod-Domar model.

7. What is the steady state in the Solow model? Describe in words why the economy tends
toward the steady state?
8. What are the variables that the Solow and the Harrod-Domar Models share in common?
Answer: Solow and Harrod-Domar model all have the following factors in common:
 Role of Saving
 Role of Law of Diminishing Returns
 Role of Technological Progress
9. Explain how per-capita income in the steady state can increase in the Solow Model.
10. Explain intuitively what the new growth theories add in terms of realism to the Solow
Model.
11. Are structuralist approaches to economic growth consistent with the Harrod-Domar
theories of growth? How do they differ in emphasis?
12. List the important variables that economists have identified that contributed to the rapid
growth of the Asian economies in the decades of the 1960s to the mid-1990s. How do
these variables relate to the variables discussed in the three growth models (Harrod-
Domar, Solow, and New Growth)
Answers:
Important variables that have been identified that contributed to the rapid growth of the
Asian economies in the decades of the 1960s to the mid-1990s are the following:
 Developed outward-looking policies
 Emphasis on exports and Foreign direct investment
 Role of technology
 Role of Government
 Role of Education
 Rate of saving and investment
 Increased Productivity
These variables relate to the variables in the three growth models……
13. Other developing regions of the world have not been a successful in raising their standards
of living in this period. Can you identify several factors that might have been responsible
for these poorer results?
Answer:
Other developing regions of the world might not have been as successful in raising their
standards of living up to this period for several reasons. One reason maybe because they
don’t follow a more restrictive external policies. They may be also reluctant to expose
producers to competition, new ideas and methods of production. They may be also
putting a little emphasis on education which was the primary engine for economic growth
and also prevention against corrupt practices in those countries may be weak, as a result
their economy was failing.

14. What evidence is there that there has been a convergence in incomes among the countries
and regions of the world, according to Robert Barro? How do his results compare with
those we would expect from the Solow Model?
Answer:
15. What is the difference between conditional convergence and absolute convergence? What
do you think would be the result if we tested conditional convergence between South Asia,
Southeast Asia, and East Asia?
Answer:
 The concept of absolute convergence is a more specific approach than conditional
convergence and emphasized that poor countries tend to grow faster per-capita
than rich countries without conditioning on any other characteristic of the
economies while conditional convergence is a more general approach than
absolute convergence where various parameters are allowed to change between
different countries or groups of countries. Also Khan Academy states that
“absolute convergence” means a series will converge even when you take the
absolute value of each term, while “conditional convergence” means the series
converges but not absolutely.
 If we are going to test conditional convergence between South Asia, Southeast
Asia, and East Asia the result would be……….

16. What measures can the poorer countries take to accelerate their growth to bring their
standards of living more in line with the rest of the world?
Answer:
Poorer countries must focus on making a clear policies and regulations that will guide
and protect every sector of their economy, investing on education, acknowledging the
benefits and role of technology and adapting to a more innovative approach. Practicing an
anti-corrupt culture and fostering economic efficiency. Overall there should be a balanced
to every sector of economy where resources are allocated equally. Nations and its people
should work hand in hand thereby reducing the level of poverty.
17. What does the term Asian “miracle” mean? Discuss the key aspects of this “miracle” as it
evolved during the decades prior to the Asian financial crisis. Be specific, using country
examples. Which of these factors do you believe to be the key ingredients to rapid
growth?
18. How do the factors that you have identified reflect on the proportion that the Asian
“miracle” was a result of “perspiration” and not an “inspiration”?
Chapter 4

1. The Asian financial crisis was a surprise to most economists, even those that
specialized on economic developments in the region. Why do you think this
happened?
Answer:
Asian financial crisis was a surprise to most economists, even those that specialized
on economic developments in the region because of a sudden collapse of financial
markets followed by a devaluation of currencies. Asian financial crisis was a
sequence of currency devaluation and other events began in 1997 experienced by
several Asian countries including Thailand, Philippines, Malaysia, South Korea and
Indonesia. Before the crisis export performance was spectacular and economic
growth was generally higher than expected but after the attack on Thai baht market
went panic and foreign investors put out their money all at once. As a result of the
continuous attack many Asian countries faced falling currencies, devalued stock
market prices and rise in private debt which set on the crisis.

2. Can you generalize the results of your analysis in answering questions 1 to the
question of predicting an economic shock?
Answer:
The financial crisis that happened in July 1997 was unexpected. The roots and
causes why it happened is because there is no prudent regulations and lack of
risk management. Also domestic firms and foreign banks over rely on the
government. They think that the government will pay for them. Another cause is
a currency attack which cause the Thai baht to float and stock market to fall.
Due to this other currencies also became the target of international speculators
like the Philippine peso, Indonesian Rupiah, Malaysian ringgit ang Hongkong
dollar

The three alternatives and even complementary explanations for the crisis are the best
generalization of my analysis. First are the stock market, real state and bank credit
bubble. Second is the series of developments in the external sector that led to a rapid
 increase in the current account deficit, a real exchange-rate overvaluation, and
consequent decline in export competitiveness and earnings. Lastly, is the spill over or
contagion effect whereby pressure on the currency and financial markets spread from
country to country, exacerbating the crisis and weakness in the financial sectors of the
various economies.
2. Can you think of a few other instances of economic crises that came as a surprise to
government, business, financial, and academic observers? What do they have in
common with the Asian financial crisis? What are the dissimilarities?
Answer:
Financial crisis is still happening today and can also be used to help alleviate
problems in the future. In instance of government, who need to keep an eye on
spending any infrastructure spending dictated by the government could have
contributed to the asset bubbles that caused this crisis. In business, they are
monitoring their financial statements some are end up in bankruptcy. Another is that
of investors, they should beware of asset bubbles some of them end up bursting. Their
similarities are that of the situation where the value of asset drop and often triggered
by a panic or a bank run. On the other hand, their dissimilarities are the reason why
they end up in that situation.
3. Explain how the institutional and cultural setting of financial institutions in Asia
contributed to the crisis?
Answer:
A country’s institutions are consequence of culture. Banks, investment banks, credit
card companies, stock brokerages and insurance company are the contribution of
institutional setting of financial institutions to the crisis. On the other hand, context of
business ethics which is generally neglected during the crisis is the contribution of
cultural setting of financial institution.
4. Have these institutions changed since the crisis? If so, in what ways?
Answer:
Yes, these institutions have changed since the crisis such that importing and
exporting going rapidly, growth enhancing and capacity expanding of different
economies where borrowing and investment took place. Some economies reduced
 foreign investment, trade and remittances that is why these institutions have changed
–maybe in better changes or in worst.
6. Knowing what we know now about crisis, do you think governments are better able to
predict and financial activity as an early warning system?
Asnwer:
For me, governments have a power, freedom and ability to predict the onset of another
crisis they can even prevent it as well. Protectionist measures to ensure the stability of
their currencies will serves as an early warning system and must be the adopted measure
to monitor economic and financial activity.
7. How did SARS and the Iraqi war effect the Asian region? Were these impacts similar
to those of the Asian crisis? How were they different?
Answer:
The effect of severe acute respiratory syndrome (SARS) and Iraqi war has inflicted a
heavy and abrupt blow in Asian region especially in the economy of China. It causes a
plunge in in retail sales, a slump in demand exports and a near-collapse in domestic and
foreign tourism. Due to fear of infection and terrorism, people cancelled travel plans and
reduced spending on dining-out and shopping. They are similar in a way that people feels
panic, uncertainty sparked and steep decline of consumer confidence. They are different
in a way that Iraqi is a war and SARS is epidemic.
8. Some observers have suggested controls to cut down on the votality of capital
movements. What are the advantages and disadvantages of such proposals?
Answer:
Volatility caused sharp changes in the balance of payments and put pressure on
governments to adjust their budgets to reflect these dramatic shifts. The advantage of
cutting down.
9. Governments have built up significant levels of foreign reserves since the financial
crisis. Discuss the policy issues relating to such a policy. What would you say to the
statement: "You can never have too much foreign reserve cushion".
10. The Asian financial crisis has been characterized as a crisis of the private sector in
contrast to previous crisis in Latin America that originated in the public sector. Comment
on this characterization using concrete examples from the Asian crisis countries. Discuss
the progress that has been made in dealing with the aftermath of the Asian crisis at least
two countries. Be specific about the measures undertaken.
11. The recent financial crisis in the industrial countries is not expected to have as big an
impact on the Asian economies as the financial crisis of 1997. Explain why this is so.
Chapter 5

1. What are the major factors that contributed to productivity gains in agriculture in
Asia in the past twenty-five years? Is the rate of growth of the agricultural sectors
likely to slow down or accelerate? Reflect on how these factors are likely to change
in the future.
Answers:
The major factors that contributed to increased agricultural productivity in Asia
are the Green Revolution, increased yields from higher yielding varieties, application
of fertilizers, pesticides and herbicides and a more extensive irrigation.
With the continuous development and innovation that is made in the agricultural
sector to help the farmers the rate of growth will likely to accelerate if these
techniques were maintain. However, agricultural sector should always be alert to
relative changes since more innovative approach are discovered and developed every
year in the factors that affect productivity to constantly maintain and reduce crop
failure.
2. There has been considerable discussion of the role of mechanization in creating
employment and raising labor productivity. Are there any general guidelines to
follow in suggesting a mechanization policy for the Asian developing countries?
Answer:
General guidelines for the formulation of an agricultural technology strategy are
given. But it wasn’t elaborated. Mechanization could increase productivity and boost
agricultural and food production with the use of equipment and machineries but this
decision is left on the Asian developing countries whether to mechanize or not. We
can conclude here that adopting mechanization needs a greater amount of capital so
countries who want to invest in mechanization should consider the amount of capital
they need to invest.

3. Consider two countries, one that subsidizes agriculture, and another that subsidizes
industry. They are identical in all other respects. Which country has a better chance
of achieving rapid growth with poverty reduction?
Answer:
 For me, both countries could achieve rapid growth. It just depends on how they will
protect their economy against foreign competition, how they will maintain the inflow
and outflow of resources, how will they maximize their resources available, how will
they adapt to technological changes and how they could work for better strategies to
achieve rapid growth thereby reducing poverty.
4. Why are the terms of trade between agriculture and industry so important in
determining the rate of growth of an economy in the transition from focusing on
agriculture to manufactured products?
Answer:
Terms of trade between agriculture and industry are so important for it will have
an effect in both sectors. They are not alternatives but complementary and are
mutually supporting with respect to both inputs and outputs. It is can be seen that
increasing agricultural output and productivity will to contribute substantially to an
overall economic development of the country for it seen as a backbone of the
economy. Agricultural development plays a major role for the process of
industrialization. Together with industrialization these could lead to an increased
demand in industrial production.
5. Genetically modified crops (corn, for example) have been developed in the United
States and are being exported around the world. There is, however, resistance to
these exports in many countries. Why do you suppose this is so?
Answer:
6. Africa seems to be locked in a cycle of producing agricultural products for export.
The terms of trade for these goods continue to deteriorate, creating a downward cycle
of slow or negative growth. How has Asia avoided such a cycle? What are the major
factors involved?
Answer:
7. You are having a discussion with another student who says that agricultural growth is
not important when it comes to understanding the experience of economic
development in Asia. How would you respond to this statement? What kind of
evidence is there to either support or refute the student's statement? Use specific
country or regional examples where possible.
 Anwer:
I would simply start my statement by discussing to him how agricultural growth
plays a vital role in our economy. At the beginning of post war era, all economies in
Asia were primarily dependent on agriculture. It is considered as the backbone of
economy where most Asian countries started off. Most Asian countries including
Southeast and East Asia had both high rates of economic growth and agricultural
growth in the last 3 decades. Saying agricultural growth is not important without
enough evidence is false because in reality agricultural growth contribute
substantially to an overall economic development of the country.
8. What changes have been occurring in the structure of agriculture in Asia in the past
two decades? How are these changes likely to affect the behavior of the farmers?
Answer:
In the past two decades there have been a more than changes in farming practices.
They are adapting some agricultural transformations that lead to higher productivity
on farms, commercially orients farming, and strengthening the link between farming
and other sectors of the economy. They also developed more extensive irrigation
helped to regulate the level of water in the fields and higher-yielding rice varieties
were designed for a more stable water level therefore more suitable for irrigated land.
All of these innovations have helped farmers generate more income to buy consumer
goods, find jobs during dry and slack season, and it also helped them more adoptable
to change although some framers still resist innovation and modernation.

9. Explain why research and development are much more important now than they
were a few decades ago.
Answer:
Research and development are much more important today because it introduces
solution to the unending problems we are experiencing as technology improves. It
helps farmers and other sectors of economy including researchers to develop new
knowledge, techniques, strategies and technologies that might help in reducing the
needs and solving different problems in our economy. As technology changes, people
 can produce more innovative products that can be a substitute to our limited
resources.

CHAPTER 6
1. Assess the strengths and weaknesses of the Lewis-Fei-Ranis model of economic
growth and structural transformation. Can you think of ways to improve the
model?
2. There are two strands of thought regarding industrialization. The first says it is
important to have a larger market in order to take advantage of scale economies
and to produce efficiently at low cost. The second says that small-scale industries
have been very successful because they have been able to take advantage of shifts
in demand, innovation, and fashion because of their size. How do you reconcile
these two ideas?
3. Does the answer to Question 2 have anything to do with changes in n technology
over the past several decades?
4. The debate is whether the rapid growth in Asia was a result of "inspiration" or
"perspiration." What exactly does this phrase mean? Explain the arguments for
both sides. Has there been a shift in the evidence over time? If there has, what do
you think are the reasons for this shift?
5. Alice Amsden and Michael Hobday, among others, argue that the total factor
productivity debate misses the point. What exactly are they talking about?
6. Some writers argue that the development of the electronics industry has been a
"double-edged sword". Explain how this reasoning goes. What are the trends for
the next few years and how will this affect the relative costs and benefits of
further intensification of production in electronics?
7. Discuss the interrelationship between education and the shifts that have taken
place in industrial production in Asia over the past two or three decades. How
does comparative advantage fit into this paradigm?
8. How can state-owned enterprises (SOEs) stifle innovation? In a country with a
large SOE sector like China or Vietnam, has still been possible to grow rapidly
and to stimulate innovation? How has this happened?
9. Is the motivation to migrate from the rural areas to the city generally the same as
the motivation to work overseas? Discuss some of the possible differences in the
variables that explain migration in these two cases.
10. Hobday, Amsden, and others with similar views have written about the
industrialization experience of countries in East Asia. What is the basic thrust of
their argument? How does their analysis impact on the current debate about the
role of China in the future growth and development trajectory of the Asian
region?
11. Discuss the total factor productivity question with respect to the Asian
developing economies. In the discussion, review the Krugman-Young evidence
with respects to the impact of total factor productivity on growth and then
examine other evidence that has been presented since their articles were written.
If there are differences between Krugman-Young and more recent evidence,
explain why and how these differences may have arisen.
Chapter 7

1. Explain why the assumptions of the Ricardian model of international trade are not
particularly realistic. Why do we study this model if the assumption is not realistic?

2. How does the HOS model modify the Ricardian model? Does this add sufficient
realism to the model?
3. Is there any relationship between the Gravity model and the Ricardian and HOS
models? Which model is more realistic in your view?
4. How do you explain the fact that the theories of international trade that we have
discussed stress that more trade takes place when factor endowments are different with
the empirical results that most trade takes place between rich countries with similar factor
endowments?
5. Import-substitution policies are very attractive and have been adopted by many
developing countries. Explain the advantages of such policies.
6. Eventually import-substitution policies were replaced by other policies. What were
these policies and why were they adopted?
7. Explain the rationale for dual pricing. What is the difference between dumping and
dual pricing?
8. The "Flying Geese" model is based on shifting comparative advantage. Does this
model have its roots in international trade theory or in growth theory? How can growth
theories be adjusted to take the "Flying Geese" paradigm into account?
9. Discuss the relative costs of an import tariff versus an import ban. What is the crucial
distinction between two economic effects? Demonstrate graphically.
10. What is the fallacy of composition suggested by William Cline? What are the
empirical results regarding this fallacy? Are they different from the theory? Why?
11. Foreign direct investment has helped many countries to develop in Asia. Still, there
is some reluctance to accept or attract foreign direct investment in certain countries.
Explain their motivation? Have any countries been successful in growing rapidly without
much FDI? If so, how did they do it? Can their experience be replicated?
12. Discuss how the factor price equalization theorem worked in Asia and how did it
relate to the "Flying Geese" model?
13. Explain the statement, "The Asian financial crisis was intimately related to foreign
trade". 14. Discuss why there was been such a large increase in intraregional trade in the
past decade, even while there is so much concern about competition from China
15. Discuss the relative advantage of bilateral preferential trade agreements and
multilateral agreements?
16. How does the discussion regarding trade in services relate to innovation
developments in globalization, and in information and computer technology?
17. Explain the meaning of triangular trade. How does this term relate to the trade
relationship between China and other Asian economies? 18. Discuss how the rapid
growth in China has impacted on the other countries in Asia in terms of the pattern of
international trade.
CHAPTER 8

1. The importance of income in determining savings has persisted since the time of
Keynes. Why have other theories failed to displace income as the most critical
variable in saving theory?
2. What is Ricardian equivalence and what does it have to do with the level of saving?
3. Demographic factors seem to have a powerful influence on saving in Asia. Why
should it be so in this developing region and not in others?
4. Why do you think that Harrigan found that the share of agriculture in GDP had a
significant positive effect on saving?
5. The evidence on Asian banking systems shows that there was a significant amount of
financial repression throughout the region. Yet the region grew rapidly in spite of it.
Does this mean that financial repression does not have a negative effect on economic
growth and the allocation of resources?
6. What is a “kerb” market? How do you think it got its name? Why did these markets
spring up and thrive in Asia during the period of rapid growth in the 1960s, 1970s and
1980s?
7. Contrast the financial liberalization experience of Hongkong and Singapore with that
of India and the other countries of South Asia.
8. Explain why certain variables, such as ratio of money supply to GDP, are used to
measure the degree of financial repression. When liberalization takes place, what
should happen to these variables? Why?
9. Explain why financial liberalization may not necessarily result in an acceleration of
economic growth and increase economic efficiency.
10. What went wrong with the financial liberalization measures taken in South east and
East Asia? Refer to particular country examples.
12.
13.