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Midterm Exam 1
ECO 2117B - Introduction to Development Economics
February 2, 2024
Name:
Student Number:
INSTRUCTIONS
You have 80 minutes to complete the exam (from 11:30 a.m. to 12:50 a.m.).
•
This exam consists of 30 multiple-choice questions, each contributing equally to your total grade.
•
Read each question thoroughly before selecting an answer.
•
Record all answers on the provided Scantron sheet using a pencil.
•
A formula sheet is included at the end of this exam for your reference.
•
The sharing of calculators is not allowed.
•
This questionnaire is printed on both sides. Please check to ensure you have all pages.
•
A detachable blank sheet is provided at the end for rough calculations.
•
Write your full name and student number on the top of the first page.
•
On the Scantron sheet, enter the
course code
, your
student number
, and your
last name
. Ensure
all cells are filled in properly.
•
Incomplete or missing personal information on the Scantron may result in your exam not being graded.
•
After completion, submit both the Scantron sheet and this questionnaire directly to the TA or professor.
Questions
1. According to the Input-Output analysis, how do linkages contribute to the overall economic develop-
ment of a country?
(a) By encouraging economies of scale within specialized sectors without inter-industry exchanges.
(b)
They generate multiplier effects that can lead to increased production and employ-
ment across sectors.
(c) By facilitating bilateral trade agreements, which align the economic policies of partner countries
to create a unified market presence.
(d) Through fostering competitive import substitution, reducing the need for sectoral interdepen-
dence.
(e) All of the above.
1
2. During the 1960s and 1970s, what observation led to rethink the exclusive focus on economic growth
in development economics, and a shift towards considering also inequality and poverty?
(a) Very rapid economic growth internationally and the elimination of income inequalities and poverty
across nations.
(b) Economic growth led to decreased income inequality in poor countries but increased income
inequality in rich countries.
(c)
Economic growth increased inequality in several cases, and development economists
found that growth alone was not enough.
(d) Very low economic growth internationally but the elimination of income inequalities and poverty
across nations.
(e) None of the above.
3. What relationship between income levels and income inequality is suggested by the Kuznets’s inverted
U hypothesis?
(a)
It proposes that income inequality will intensify in the initial stages of a country’s
economic development, but after a certain threshold, further growth will lead to a
reduction in inequality.
(b) It suggests that income inequality remains constant as a country transitions from low-income to
high-income status.
(c) It indicates that higher levels of income in a country will always be associated with lower levels
of inequality.
(d) It posits that economic growth in a country leads to a diversified economy where income inequal-
ity is addressed through sectoral shifts and educational advancements, effectively rendering the
relationship between growth and inequality neutral over time.
(e) None of the above.
4. What does the theory of the Taking Off say about the process of development?
(a) High-income countries will maintain their economic status, with low-income countries remaining
in a perpetual state of underdevelopment.
(b) Development trajectories are predetermined, with historical patterns dictating the exclusive path
for each country’s economic evolution.
(c)
All economies have the potential to achieve growth through sequential stages, even-
tually reaching a stage of development.
(d) Economic development is a zero-sum game, with one country’s development only possible at the
expense of another’s stagnation.
(e) None of the above.
5. A development economist is designing a Randomized Controlled Trial (RCT) to evaluate the impact of
microfinance programs on small business growth in rural areas. The economist has a list of 200 small
businesses that are eligible for the program. To ensure the study’s validity, which of the following steps
should the economist take to randomize the treatment?
(a) Select the 100 businesses closest to the microfinance institution to receive the program, as they
are most likely to participate.
(b) Assign the businesses to the treatment or control group based on their past financial performance
to ensure groups are comparable.
(c)
Use a lottery method where each business has an equal chance of being selected for
the treatment group, irrespective of their location or past performance.
2
(d) Choose businesses for the treatment group that have the highest need for the program, as deter-
mined by a survey of their financial needs.
(e) None of the above.
6. In the context of Randomized Controlled Trials (RCTs), what does the selection problem refer to?
(a) The challenge of randomly selecting a sufficient sample size for the trial.
(b) The difficulty of choosing the most effective treatment to be tested in the trial.
(c)
The issue that occurs when characteristics that affect participation are also related
to the outcomes being measured.
(d) The challenge of ensuring that the trial results are applicable to the general population.
(e) All of the above.
7. How can the selection problem specifically impact the results of an RCT?
(a) It prevents the results from being generalizable to the entire population of interest.
(b)
It may lead to biased estimates, meaning we can overestimate or underestimate the
effect of the treatment.
(c) It complicates the analysis because it prevents the group that needs the treatment the most from
necessarily receiving it.
(d) It minimizes the need for randomization by creating naturally occurring comparison groups.
(e) All of the above.
8. What are spillover effects in the context of a social cash transfer (SCT) program?
(a) The combined direct and indirect effects of the transfer on the income of households receiving the
treatment.
(b) The immediate increase in income for the households directly receiving the cash transfer.
(c)
The effects of the transfer on households that did not receive the cash transfer but
are part of the local economy and may be indirectly affected.
(d) The opportunity cost associated with implementing the social cash transfer program.
(e) None of the above.
9. Why are placebos used more in medical trials than in social science experiments?
(a)
In medical trials, placebos can be used to keep patients unaware if they are receiving
the real treatment. This is often not applicable in social science experiments because
of the practical nature of the treatments.
(b) In social science experiments, it is not necessary for the control group to think they are getting
the real treatment to accurately measure its effects.
(c) Ethical rules in social science experiments often prevent researchers from using placebos that
could mislead participants.
(d) The psychological effects of placebos are significant for medical outcomes but are not as applicable
in social science studies.
(e) None of the above.
10. Even when we have pre-treatment and post-treatment measurements of the outcome of interest for the
treatment group, why is a control group essential in a Randomized Controlled Trial (RCT)?
(a) To help mitigate selection bias by ensuring that participants in the treatment group are similar
to those in the wider population.
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(b) To provide additional data for analyzing whether the treatment is more effective for certain types
of participants.
(c)
To compare the treatment group with a baseline that shows what happens without
the treatment, taking into account natural changes in the condition and external
factors that could affect the results.
(d) To ensure that the study results can be generalized to other settings or populations, enhancing
the external validity of the research.
(e) All of the above.
11. Why is Cost-Benefit Analysis (CBA) important for development economists when evaluating projects?
(a) It accounts for the opportunity cost of using resources in one project instead of another.
(b) It includes the time value of money, recognizing that the value of money changes over time due
to factors like inflation and interest rates.
(c) It helps to assess if a project’s long-term benefits justify its initial costs, considering both present
and future values.
(d) It allows economists to compare the net present value of different projects to make informed
decisions.
(e)
All of the above.
12. Why is considering the bank’s interest rate important when conducting a Cost-Benefit Analysis (CBA)
for a development project?
(a)
Because the bank’s interest rate represents an alternative return on investment,
serving as the opportunity cost of the project.
(b) Because a higher bank interest rate directly increases the costs of the project.
(c) Because the bank’s interest rate has to be paid by the project, adding to its expenses.
(d) Because the interest rate affects the project’s deadline to break even, unrelated to the opportunity
cost.
(e) All of the above.
13. If you want to save enough money to have
$
1,000 in a bank account three years from now at an annual
interest rate of 5%, how much would you need to deposit today?
(a)
$
816.30
(b)
$
863.84
(c)
$
888.49
(d)
$
850.00
(e) None of the above.
14. You are evaluating a project with an initial cost of
$
60 at time
t
= 0 and annual benefits of
$
20 for
each subsequent period from
t
= 1 to
t
= 4. If the interest rate is 7%, what is the Net Present Value
(NPV) of the project? (Round your derivations to two decimal places.)
(a)
$
5.81
(b)
$
7.77
(c)
$
9.85
(d)
$
12.32
(e) None of the above.
4
15. Which of the following statements accurately describe limitations of Cost-Benefit Analysis (CBA) when
evaluating development projects?
(a) CBA can be complex as it requires the conversion of diverse benefits and costs into monetary
values, which is not always straightforward.
(b) Benefits like environmental impacts and human rights are difficult to quantify, making them
challenging to include in CBA.
(c) Projects can have externalities and spillover effects that are not captured by traditional CBA,
such as health benefits in community interventions.
(d) CBA may not fully capture the long-term value of educational outcomes or the societal benefits
of providing clean water.
(e)
All of the above.
16. The income of a country is equivalent to:
(a) The Gross Domestic Product (GDP)
(b) The value of all final goods and services produced in a country less the imported inputs.
(c) The sum of all the value-added in production in a country.
(d) The cost of all factor inputs in production, that is, the sum of payments going to labor and capital
in a country.
(e)
All of the above
17. How is GDP measured using the expenditure approach?
(a)
By adding up the market value of all final goods and services produced within a
country’s borders in a given period, after subtracting the value of imported inputs.
(b) By assessing the total amount of government taxation minus public spending to determine the
net contribution to the domestic economy.
(c) By totaling the incomes that firms pay households for the factors of production they hire - wages
for labor, interest for capital, rent for land, and profits for entrepreneurship.
(d) By calculating the value of all final goods produced, without considering the intermediate goods
used in their production to avoid double counting.
(e) None of the above.
18. Why do economists use Purchasing Power Parity (PPP) adjustments when comparing per capita income
across countries?
(a) To incorporate the varying effects of monetary policies on different economies.
(b) To reflect the universal trend of rising prices over time in each country.
(c)
To adjust for disparities in the cost of living between countries.
(d) To emphasize the significance of real GDP over nominal GDP in income comparisons.
(e) All of the above.
19. Based on the 2010 Input-Output table provided bellow, what was the Gross Domestic Product (GDP)
of Wonderland for that year?
(a)
$
1,780, corresponding to the total value of final goods and services reflected in the final demand.
(b)
$
4,318, which is the total revenue generated by production sectors and income to households.
(c)
$
1,380, which represents the sum of payments to factors (labor and capital).
(d)
$
1,558, the difference between total sector sales and the sum of wages and profits paid.
(e) None of the above.
5
20. Based on the 2010 Input-Output table for Wonderland provided, which of the following statements is
incorrect
?
(a) The industrial sector bought
$
85 in intermediate goods from the agricultural sector and
$
140 from
the services sector.
(b)
The industrial sector bought
$
280 in intermediate goods from the agricultural outputs
and
$
95 from the services sector.
(c) The agricultural sector’s total expenditures was
$
1,030.
(d) The total output of the services sector was
$
613.
(e) None of the above.
Figure 1: Input-Output table for Wonderland in 2010. Use this table to answer questions 19 and 20
21. Which one of the following terms have been used to name developing countries?
(a) Developed countries.
(b) First World countries.
(c) Industrialized countries.
(d) High income countries.
(e)
None of the above.
22. Why is normalization important in the context of index creation, such as when measuring income
growth or assessing poverty levels?
(a) To refine the representation of variables for more precise analysis.
(b)
To adjust diverse variables to a uniform scale, facilitating valid comparisons.
(c) To enable the direct correlation of different variables while acknowledging their unique impacts.
(d) To streamline the computation of indexes by converting all values to integers.
(e) None of the above is correct.
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23. The poverty head count index expresses the number of poor people as a fraction of the population of
a country. What is the minimum and maximum value that this index can take?
(a) -1 and 1
(b)
0 and 1
(c) 0 and 0.5
(d) 0 and 10
(e) None of the above.
24. The distance between a person’s income and the poverty line is called:
(a)
The poverty gap.
(b) The poverty head count.
(c) The personal poverty line.
(d) The Forster-Greer-Thorbecke (FGT) measure.
(e) None of the above.
25. Which statement does NOT accurately describe a poverty trap?
(a) A poverty trap is a self-perpetuating condition where poverty itself makes it difficult to escape
poverty.
(b) A poverty trap can affect individuals, families, regions, or entire nations.
(c)
Even modest, consistent financial support may assist in breaking free from a poverty
trap.
(d) Large-scale policy changes or substantial financial assistance are the exclusive means to exit a
poverty trap.
(e) All of the above are true characteristics of a poverty trap.
26. Why might relying solely on the poverty headcount index or the poverty gap as metrics for evaluating
poverty reduction policies create perverse incentives?
(a) These metrics can overemphasize the significance of short-term economic fluctuations.
(b) Such measures might lead to an overconcentration on urban poverty, neglecting rural areas.
(c) They often result in an underestimation of the multidimensional nature of poverty.
(d)
Policymakers might design programs that primarily assist those just below the poverty
line, rather than the poorest individuals.
(e) None of the above.
27. What does the total poverty gap indicate about poverty in a given area?
(a) It measures the average income shortfall of people from the poverty line, reflecting the intensity
of poverty.
(b)
It reveals the aggregate amount of income needed to bring everyone above the poverty
line, effectively showing the cost to eliminate poverty.
(c) It calculates the proportion of the population living below the poverty line, indicating the preva-
lence of poverty.
(d) It assesses the distribution of income among the poor, highlighting income inequality within that
group.
(e) None of the above.
7
28. Given that City A has a squared poverty gap index of 0.21 and City B has an index of 0.18, which of
the following statements is accurate?
(a) City A has a larger number of individuals living below the poverty line compared to City B.
(b)
Poverty in City A is more severe, with the squared gap indicating greater disparities
among the poor compared to City B.
(c) City B experiences more severe poverty, as indicated by its lower squared poverty gap index.
(d) The squared poverty gap index suggests that City A and City B have a similar depth of poverty.
(e) None of the above.
29. Suppose you are in charge of implementing a social cash transfer program with a limited budget.
The success of this program will be evaluated using the squared total poverty gap index. Given this
criterion, what would be the most effective strategy for the allocation of funds?
(a) Provide uniform cash transfers to every person below the poverty line to ensure equitable treat-
ment across all recipients.
(b) Prioritize individuals who are close to the poverty line with higher transfers, aiming to reduce the
overall number of people below the threshold.
(c)
Target the bulk of the cash transfers towards individuals who are the most below the
poverty line, given that the index significantly weights these larger gaps.
(d) Assign the cash transfers randomly across the population below the poverty line, to avoid any
bias in the distribution of funds.
(e) None of the options above would be effective.
30. How does the staple calorie share (SCS) approach address some of the challenges in defining a poverty
line?
(a)
It acknowledges that as income rises, people often choose tastier, more expensive
foods over cheaper calories.
(b) It considers the quality of diet and individual choices, recognizing that dietary preferences change
with income levels.
(c) It compensates for the lack of consensus on caloric thresholds, which vary across different popu-
lations and activity levels.
(d) It takes into account how nutrient absorption and health status can impact the effectiveness of
caloric intake.
(e) All of them.
8
Formula sheet
PV
=
FV
(1 +
i
)
t
(1)
NPV
=
T
X
t
=0
Benefits
t
−
Costs
t
(1 +
i
)
t
(2)
ˆ
Y
real
=
ˆ
Y
nominal
−
ˆ
π
(3)
P
H
=
q
N
(4)
Total poverty gap:
q
X
i
=1
(
z
−
Y
i
)
(5)
Total poverty gap index:
FGT
1
=
1
Nz
q
X
i
=1
(
z
−
y
i
)
(6)
Squared poverty gap index:
FGT
2
=
1
Nz
2
q
X
i
=1
(
z
−
y
i
)
2
(7)
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