Exercises: Factors of growth and income distribution

Explain what economic growth is and which measure is typically used to quantify it. For a country, what difference does it make to grow by $2\ \%$ compared to $5\ \%$?

Name the factors that explain an economy's growth and classify these examples: building a motorway, training workers, inventing new management software, and having courts that enforce contracts.

The figure shows the Lorenz curve of an imaginary country: on the horizontal axis, the cumulative percentage of population (from poorest to richest) and, on the vertical axis, the cumulative percentage of income received.

1. a) Which measure of inequality is provided by the gap between the curve and the diagonal? Explain your answer.
2. b) Interpret the marked point: what does it mean for the poorest $60\ \%$ of the population to receive $25\ \%$ of the income?

The GDP of a country increases from $2\,000\,000$ million pesos to $2\,080\,000$ million in one year.

1. a) Calculate its annual growth rate.
2. b) If the population grew by $1\ \%$, did income per capita also grow? Justify your answer.

The countries Arta and Briga have the same GDP, $4\,000\,000$ million pesos, but Arta has $5$ million inhabitants and Briga has $10$ million.

1. a) Calculate the income per capita of each country.
2. b) Explain why GDP per capita is a better measure than total GDP for comparing living standards.

A government increases taxes on high incomes to fund school meal grants.

1. a) Analyse the measure from the perspective of efficiency and equity.
2. b) Explain the potential conflict between both objectives and reason whether it exists in this case.

The Ministry of Economy has an extraordinary budget allocation to reboot the economy and is torn between two opposing measures:

• Proposal A: Distribute a direct check of 1 peso 000 to each citizen to boost immediate consumption.

• Proposal B: Finance a ten-year plan to modernize Dual Vocational Training and provide advanced technical qualifications.

1. a) Economically justify why Proposal B has a greater capacity than Proposal A to shift the PPF (Production Possibility Frontier) to the right in the long run. Model the complete causal chain connecting human capital accumulation with potential GDP growth, explaining its effect on labor productivity, unit labor costs, and aggregate demand.
2. b) If Proposal B generates more solid and sustainable growth, predict why governments often have incentives to opt for Proposal A. What political business cycle failure explains this time lag, and what institutional mechanism would you design to shield training investment from electoral cycles?

Look at the following data for two economies with an identical GDP per capita of 32,000 pesos:

• Country A: The richest 10% concentrates 48% of the national income (Gini index = 0.46), the early school leaving rate is 22%, and life expectancy at birth is 76 years.

• Country B: The richest 10% concentrates 21% of the national income (Gini index = 0.26), early school leaving is 5%, and life expectancy at birth is 83 years.

1. a) Relying on the law of diminishing marginal returns of income on individual well-being and access to merit goods, justify why Country B achieves substantially better social indicators while having the same average income per capita as Country A.
2. b) An analyst in Country A argues that "the absolute priority must be to maximize GDP per capita growth up to 36,000 pesos by lowering taxes on high incomes, as their wealth will trickle down to the rest." Critically evaluate this statement: predict its impact on the Gini Coefficient and the HDI, and explain what analytical bias they commit by using only GDP per capita as a thermometer of socioeconomic progress.

Analyze the well-known statement: "We should not worry about inequality: if the country grows, the economic tide rises and lifts all boats equally, so the social gap closes on its own."

1. a) Rigorously refute this statement using the concepts of the Lorenz Curve, Gini Coefficient, and the distinction between absolute poverty and relative poverty. Demonstrate how an economy can experience an annual GDP growth of 3.5% for a decade and, at the same time, move its Lorenz Curve further away from the line of perfect equality.
2. b) Design a package of two complementary public policies (one supply-side and one redistributive) to ensure that a period of digitalization-driven growth reduces the Gini Coefficient without discouraging business investment or distorting labor supply. Justify their transmission mechanisms.