Economics 4130 Sp13 Midterm 1

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1. Question 1
a. List 2 data sources researchers use to estimate historical standards of living and explain what they can infer from these sources.

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i. Life expectancy at birth. Unambiguous measure of welfare
ii. 4. heights and skeletal remains (Professor Steckel’s research)
iii. Individual height is determined by “genetic potential” basically how tall were your mom and dad. In large numbers, we know that heights of humans does not vary by race or ethnicity. In large numbers differences are due to environmental factors like diet, nutritious, stress and work effort during growing years, diseases

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1. Question 1
b. List three indicators of economic development other than National Income measures (NI, GDP, or GNP, level, growth rate, or per capita) that are of interest to economists and explain what can be inferred from each of these indicators.

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i. Adult literacy, both female and total: Adult literacy is a good human capital measure (productive capacity of a society). Negatively correlated with child labor. If kids are in school learning to read, then they’re not in fields or factories, associated with more development economy
1. Female literacy, good yardstick of gender equality
ii. Final goods and services on a per capital basis, looking at the increase of final goods and services shows the development of productivity and resource usage of the economy
iii. Average annual rate of inflation: Measure of gov’t stability. Low (stable) rate of inflation shows that the gov’t is not printing money for its own purposes (wars, palaces, lavish courts)

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2. Question 2
a. Explain in detail 3 weaknesses of per capita GNP (or GDP) as a measure of economic well-being.

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i. 1. Does not capture all economically important activities
1. Black market / informal market – much larger in less developed countries
2. Agriculture production for own consumption
3. House work
ii. 2. Dollar value of a good does not always equal “social” value (e.g., no accounting for pollution costs)
1. Problem of externalities. Debate over the standards of living during the industrial revolution. Wages rose, prices dropped, but other aspects of life deteriorated
iii. 4. Does not account for differences in “cost of living” across time and space
1. Even if GDP per capita were a good measure of average income, comparisons across space and time would be hindered by the fact that the “cost of living” – that is, the cost of a certain bundle of goods or a certain lifestyle – is not the same in different societies (prices – housing prices in particular, taxes, etc.)

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1. Question 2
b. Although this measure has the flaws you just listed (and others) it is the most oft-referenced statistic when considering standard of living differences across countries. Why?

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i. **Despite these caveats, GDP still most oft-referenced measure of countries’ welfare for two main reasons:
1. It is available for most countries for many years (At least 50), back to 1840 for the US. Even further back for Britain and some other European nations.
2. Highly predictability correlated with any other measure.

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3. Question 3
a. Describe the North and Thomas model explaining the Neolithic Revolution. Specifically, use a graph to illustrate how population growth affected this change.

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1. The value marginal production that man gets from hunting is high and constant until a certain level of increase population (qd), when the return begins to diminish.
2. The value marginal production that man gets from agriculture is constant with increase population, yet lower than hunting up until a certain point, qc.
3. This decrease in returns to scale of hunting is due to decreases in productivity.
4. Hunting will continue until it reaches the population level of qc, which is the intersection of the value marginal production of hunting and agriculture.
5. After this intersection, resources will be allocated to agriculture, as the line is constant with population growth, and more value adding than hunting.
6. In sum, there are three changes that could account for the transition from hunting to ag. Individually or acting in concert, a decline in the productivity of labor in hunting, a rise in the productivity in agriculture or a sustained expansion of the size of the labor-force, could have resulted in the transition of man from being exclusively a hunter to increasingly a farmer.

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3. Question 3
c. How is this model consistent with what we know about the transformation from Hunter-Gatherers to Settled Agriculturists?

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i. Extinction of mammoths—implications for diminishing Sreturns to hunting.
1. Ice age exogenous shock. Climate change also decreases yield of hunt
ii. Establishments in the fertile crescents. Civilization that can support large populations form independently in Mesopotamia, N. China, Meso-America (Central America). Areas best suited to primitive agriculture

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4. List 4 contributions of the earliest civilizations (those that eventually formed the Babylonian Empire) and explain how each was important to continued economic growth.

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a. Writing
i. Bureaucratic necessity: state needed to keep records of tax collections and tributes
ii. Script used to set down other languages besides Sumerian. Phonetic symbols allowed script to be used to write other ancient languages
b. Arithmetic. Necessary for keeping track of accounts.
c. Weights and measures. Standard units of trade.
d. Codes of Law.
i. Civilization required the development of law–codified rules to regulated interactions.
ii. Many laws dealt with Economic life. Regulation of contracts, specifying irrigation procedures, regulation of lending practices (33 1/3 % interest on loans of grain, 20% on loans of silver), setting of maximum wages.
iii. This shows the extent of development of commerce as well the role of the state in the economy

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5. What were the major contributions to economic development of the Phoenician Empire? (FIND 2)

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i. Phoenicians: the first merchants and colonists. Port empire
1. Phoenicians (from 3,000 B.C.), then Greeks and Romans built their empires along the Mediterranean.
ii. Greeks and Romans adopted Phoenician alphabet and other commercial techniques.

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5. What were the major contributions to economic development of the Greeks? (FIND 3)

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i. Literacy
1. Human capital
ii. Colonization of trade ports (increased trade)
1. Greek city-states extensively colonized Asia Minor and the Italian peninsula, prime source of economic gains.
a. Motivations.
i. To deal with excess population
ii. To deal with shortages of foodstuffs in founding cities; to obtain a supply of grain and other agriculture products for founding cities.
iii. To develop trading relationships and extend markets
2. Founding cities did not try to maintain political control over colonies; instead maintained ties of kinship and commercial interaction.
3. Consequences
a. Extension of trade (further distances than every before)
b. Expansion of production—colonization increased their resources available (land, labor, raw materials)
c. Diffusion of technology–spread of agricultural techniques, writing and literacy
iii. Coinage
1. Greeks introduced coinage around 600 B.C. to facilitate trade. Huge contribution!
a. Standard of account. Using goods (grain) s.t. quality differences. Gives uniform unit of payment
b. Medium of exchange. In a barter economy, you have to rely on the “double coincidence of wants” (instead of needed a 3-4 way trade to get what they need for their goods, money gives a medium of exchange)
c. Easily transported store of value. *

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5. What were the major contributions to economic development of the Romans? (FIND 3)

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i. Law Order & Justice
1. Social/political structure military focus, not trade. Interestingly, however, the military focus and prowess of Rome contributed to commercial growth during the Roman Empire.
2. 1. Conquest leads to spread of Roman law. Roman law throughout Mediterranean fosters trade expansion–enforcement of contracts over long distances, standardization of weights & measures, currency, etc. Important for the facilitation of trade
ii. Peace extended trade
1. 2. pax Romana (31 BCE - 181 CE).The long period of peace during the peak of Roman empire also contributed to the extension of trade (as well as the cultivation of the arts). This peace included a practical elimination of piracy on the Mediterranean Sea. Peace reduced the riskiness of long distance trade.
iii. Improved transportation for trade
1. 3. Military infrastructure facilitated commerce Shipping technology, ROADs (built to move troops, were used for trade)

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6. Question 6
a. What is meant by technological stagnation in the Greek and Roman Empires?

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i. Short list of new products in the 1,500 years of Greek and Roman rule.
ii. Not too impressive refinements to existing technology.
iii. Surprisingly little application of water-mill power using aqueducts.

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6. Question 6
b. How could “an Overdose of Slavery” be the cause? List 2 flaws of the slavery explanation. Provide an alternative explanation.

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i. Under slavery labor was relatively cheap, no incentive for the elites to replace human power with machine power (labor and capital as substitutes).
ii. Slaves themselves had no incentive to make labor-saving devices, since their labor would be elsewhere directed.
iii. A puzzle that the elites would not want to increase the output of each slave (labor and capital as complements).
iv. Proponents of this theory attribute the fall of the Roman Empire to the labor shortage as parasitical classes swelled.

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6. Question 6
c. Alternatives explanations for technological stagnation.

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i. The value system of the great philosopher-scientist-mathematicians which favored theory over practice.
ii. A great disconnect between the thinkers and the producers in a stratified society.
iii. The practical applications of the new scientific discoveries were mostly in weaponry in response to duress.

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7. Question 7
a. According to the Domar Model, what 3 things are incompatible simultaneously?

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i. Incompatibility of free land, free labor and non-working, landholding class. Cannot simultaneously have abundant land (little to no market value), unbound labor, and gentry. Domar equates serfdom and slavery.

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7. Question 7
b. Which two were present in the Manorial system?

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i. (free land, and non-working, landholding class.)

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7. Question 7
c. What are the three sections in the 3-Course Rotation? Why was this innovation necessary for growth during the middle ages?

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i. A typical rotation was spring crop (oats or barley, sometimes peas or beans); which would be harvested in the summer; an autumn sowing or wheat or rye, the principle bread grains, which would be harvested in the following summer; and a year of fallow to help restore the fertility of the soil
ii. Increased soil fertility, increased crop yield, different plants providing better nutrition,
1. Could support more people and animals

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b. Under a fixed rent contract: who bears the risks of a bad crop and reaps the benefits of a bumper crop? Characterize the incentive of a farmer to exert effort while working the fields.

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i. Fixed rent contract: farmer pays lord a fixed rent, r, and gets to keep the output of the land (usually referred to as tenancy).
ii. Benefit:
1. Landlord: r- c(LL)
2. Farmer: f(.) – r – c (farmer)
iii. Farmer has maximum incentive to put out a lot of effort, gets all additional output that results from his efforts.
iv. Farmer bears all (most all) the risk.
v. Costs are transactions costs-costs of negotiation the contract. North and Thomas argue that these would be considerable b/c in the absence of a $$$ economy, they would be paid in goods.

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c. Under a fixed wage contract: who bears the risks of a bad crop and reaps the benefits of a bumper crop? Characterize the incentive of a farmer to exert effort while working the fields.

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i. Fixed wage contract: landlord pays farmer a fixed wage rate, and landlord gets to keep the output of the land
ii. Benefits:
1. Landlord: f(.) – w*L – c(LL)
2. Farmer: w*L-c (farmer)
iii. Farmer has very little incentive to exert a lot of effort; will put in only enough to not be caught “shirking”
iv. Landlord bears all the risk of a bad harvest.
v. Transaction costs are negotiation (non-trivial when there is no money) PLUS monitoring-landlord has to pay someone to watch the farmer(s).

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d. Under a Manorial System: who bears the risks of a bad crop and reaps the benefits of a bumper crop? Characterize the incentive of a farmer to exert effort while working the fields.

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i. Input sharing (manorial system). Peasant contributes a fixed amount of labor L(LL) and in exchange gets strips of land, K (farmer) from which he gets to keep all the output
ii. Benefits:
1. Landlord: f(K-K(Farmer), L(LL), E(LL), Θ)-c(LL)
2. Farmer: f(K(farmer), L(Farmer), E(f), Θ)-c(f)
iii. Mixed incentive. Will work hard on his own land; incentive to shirt on days working the lords fields
iv. Shared risk

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9. Question 9
a. How specifically were manorial lands allocated between the lord and serfs?

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i. The physical attributes
1. 1. The lord’s demesne could account for 25 to 30 percent of the total arable land of the manor and contained the manor house and associated structures.
2. 2. Peasant holdings lay in large open fields which were divided into strips. Each peasant held several strips that were distributed throughout the fields of the manor.
3. 3. The common land usually consisted of waste, meadows, pasture, and woodland. Peasants used these areas to graze livestock, gather firewood, etc. but lord supervised use.

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9. Question 9
b. What are the predominate explanations for this peculiar system of land distribution? Evaluate these explanations.

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i. Social structure and organization of production
1. 1. Peasants were bound to the soil (serfdom).
a. required to contribute labor services to production on the lord’s demesne. Work on the lord’s demesne took precedence over work on their own plots.
b. Peasants also were required to make other contributions and dues to the lord. (Some estimates indicate that over 50% of the peasants’ output was extracted by the lords.)
2. 2. In exchange, the lord provided protection for the peasants and served as the judge and administrator of the estate.
ii. . “Open fields” Why were peasants’ landholdings scattered across estate?
1. Enforce cooperation—the most efficient agricultural practices of the time-use of the heavy-wheeled plow, teams of oxen, and later teams of draft horses-required cooperation among the peasants. The capital cost of this technology were too costly for any one peasant household. Resources were pooled across households. Open fields were a way to facilitate cooperation.
2. Risk Diversification. /differences in quality of land. But, can you diversify risk across a relatively small area. Locust, hailstorm, etc. would likely affect all portions.

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10. Question 10
a. Explain (preferably using a graph) why the number of manors grew as the population increased in medieval Europe.

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i. Very weak central political authorities. Chaos and constant threat of invasion. Possession of armaments separated ruling classes from laborers.
ii. Limited trade and commerce due to the danger in transporting goods.
iii. Constant returns to labor due to abundance of land.
iv. Rapidly expanding populations 1,000-1300. (Population of Europe increased from 22 to 74 million, 600-1340)
1. As marginal cost of protection exceed value of marginal product of labor, new manors formed. If you find yourself on the wrong side of the graph, have kin set up another manor, and split peasant population to make it more economically viable. When people were pushed from inside manors to outside, they became land holders right outside manor, and was the beginning of the end of this type of economic system.

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10. Question 10
b. What happened to wages and the prices of food and land? (Again, a graphical analysis is helpful)

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i. Diminishing marginal product of labor.
1. a. Excess labor on demesne.
2. Lord collected money payments from some of peasants (commutation).
ii. Shifts in the relative values of land and labor.
1. a. Increases in the price of food. Demand increases with increased populations
2. Increases in the demand for land. Demand from land (initially) after fall of Rome 700 ac, was minimal (land was basically free). The later in time, the more people, and more demand for land. Higher rental prices occur.
3. Impact on agricultural wages. Downward sloping demand curve. When wages are cheap, hire more people. When wages are high, hire less people. Increase in supply dominated increase in demand => falling wages.

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10. Question 10
c. Why did the population increase lead to the beginning of the end of the manorial system?

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i. Lords find fixed wage or fixed rent contracts more profitable than shared input (manorialism).

When people were pushed from inside manors to outside, they became land holders right outside manor, and was the beginning of the end of this type of economic system.