1. Using the latest available World Development Report from the world Bank, collect the following statistics for 4 developing and 4 developed countries: population, population growth, GNP per capita (in USD), GNP per capita (in international dollars), growth rate (per capita GNP), infant mortality rate & percentage of urban population.

Which country would you regard as more developed and less developed among the chosen ones?

I would regard Sweden as more developed because the country has the highest percentage of urban population (85%), and at the same time experience the lowest infant mortality rate (2.74 deaths/1,000 live births).

Keeping the same in mind, Nicaragua experiences the highest infant mortality rate (22.64 deaths/1,000 live births), yet also has the least percentage of urban population (57%)

  1. In a developing country during the 1990s, the incremental capital-output ratio (ICOR) averaged 2.5.

Using the Harrod-Domar growth equation, what savings rate would that country have required for achieving an aggregate rate of GDP by 8% p.a.?

Harrod-Domar Eq.:    s = gk              g = 8%            k = 2.5

 s = 0.08 * 2.5  = 0.2

 s = 20%

With the same ICOR, what growth target would be attainable if the savings rate was projected to be 27%

Harrod-Domar Eq.:          g = s / k          

= 0.27 / 2.5     = 0.108           = 10.8% growth

Suppose a country’s government fears political upheaval unless a growth of GDP by 4% can be achieved. The ICOR and savings rate are projected to be k=4 and s=14%. Show that the 4% growth rate cannot be achieved under these circumstances

If  s = 14, and k = 4,   then g = s/k     = 14 / 4           = 3.5

  • The resulting value, 3.5, falls short of the expected 4%, hence it cannot be achieved under these circumstances
  1. Given the savings rate of 14%, what ICOR value would be required to achieve the target growth rate of GDP by 4%?

s = 14%     g = 4%            k = s / g           = 0.14 / 0.04  

ICOR (k) = 3.5

  1. Choose 2 developed countries, and pull together the long-term macroeconomic data set for these 2 countries: annual economic growth rate, interest rate, inflation rate, exchange rate, current account deficit in relation to GDP, government deficit in relation to GDP, investment ratio, saving ratio, money supply, capital movement between the two countries, and other indicators that might help in explaining the changes in the exchange rates.

Which country’s currency has appreciated or depreciated over the period under consideration?

The US Dollar has appreciated over the period in consideration

  1. Why?

This can be attributed to the decline in the inflation rate i.e. from 4.4% to 3%, and the interest rate i.e. from 4.2% in 2008 to just 0.02% in 2012 over the covered period, which are some of the factors that boost investor confidence. Also to be considered is the significant savings ratio i.e. from 3% to 5%, which is one of the major factors that led to the strengthening of the economy.

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