2.

Give an intuitive explanation as to why higher saving rates are not associated with higher levels of
GDP in an economy with perfect capital mobility, but they are in a closed economy. Does this mean
that if you save a lot, you are better off in a closed economy? Why or why not?
With perfect capital mobility, the additional savings in country A can be invested in country B only.
The domestic output of country A is thus not affected. In a closed economy, any additional savings in
A must be invested in A, thus increasing its domestic output. This does not mean that saving more is
better for its citizens when the economy is closed. Indeed, if the investment in country B yields a
much higher return than in country A, the savers of country A can benefit highly from this through
higher income. This benefit may be higher than the loss from a lower domestic investment level.
3. Consider the model of an economy open to capital flows that was presented in Section 11.3. How
will an increase in the growth rate of population, holding constant the saving rate, affect GDP per
capita? How will it affect GNP per capita? How do these results contrast with the Solow model as
presented in Chapter 3?
From the model of section 11.3, we see that an increase in population growth does not affect the
stock of capital per capita. What happens is that as the population size increases, the marginal
product of capital tends to increase, thus making it higher than the world interest rate. Attracted by
this higher return, foreign investment flows into the country until the equality of the marginal
product of capital equal and the world interest rate is re-established. The constant stock of capital
per worker implies that GDP per capita is not affected by population growth when capital is perfectly
mobile, contrary to the basic Solow model which assumes a closed economy. In a way, foreign
investment compensates fully for the capital dilution effect of population growth (we assumed that
the savings rate did not change). It is actually difficult to make predictions about GNP per capita in
this open-economy version of the Solow model.
4. Consider the case of an economy that is perfectly open to the world capital market, as examined
in Section 11.3. Suppose that the world rental price of capital, rw, doubles. By what factor will the
level of GDP per worker change? Assume that the value of α, capital’s share in the production
function, is 0.5.

That is,
output per capita falls by half. This is because the higher returns in foreign capital markets makes
domestic investments less attractive. Consequently, as investors withdraw their investment from the
domestic economy, the drop in the capital stock raises the domestic return to capital since there are
diminishing returns to capital. The outflow of capital stops when the domestic return to capital is
again equalized with the higher return on foreign markets. Note that this does not mean that income
per capita falls domestically since the higher returns from foreign investments could more than
compensate for the lower output at home.

5. People in a particular country that is closed to trade consume only cheese and bread. They always
consume one slice of cheese with one slice of bread. It takes one labor-hour to produce a slice of
cheese and two labor-hours to produce a slice of bread. The country has a total of 60 labor-hours
per day. How many slices of cheese and bread will be produced perday? Now suppose that the
economy is opened to trade. On the world market, the price of one slice of bread equals the price of
one slice of cheese. How does production in the country change? What is the new consumption of
bread and cheese?
 Now, suppose the economy is opened to trade, and the price of a slice of bread equals the price of a
slice of cheese on the world market.

New Economic Behavior:

With the equalization of prices, the opportunity cost for producing cheese and bread evens out. The
country will aim to maximize production based on labor-hour efficiency.

Since 1 slice of cheese only requires 1 labor-hour (compared to 2 for bread), and both are priced
equally, it is more labor-efficient to produce cheese.

The country can theoretically use all 60 hours to produce cheese, yielding 60 slices of cheese.

It could then trade excess cheese for bread at a 1:1 ratio, ensuring no change in consumption
preferences.

Calculation:

Produce only cheese with 60 labor-hours:

6. Suppose that the world consists of 10 countries. The countries are identical in terms of their levels
of technology and efficiency, their quantities of factors of production, the preferences of their
consumers, and so on. There are two industries in the world: pizzerias and automobile factories.
Correspondingly, there are only two consumption goods: pizzas and cars. The big difference
between pizzerias and auto factories is in their scale: Auto factories have to be large, whereas
pizzerias can be small. The world starts off in autarky. In each country, the market is big enough to
support only one auto factory, although there are many pizzerias. Now suppose that the world
opens to trade. Both pizzas and autos can be traded (we ignore the fact that in real life problems of
congealing cheese prevent trade in pizzas). Trade does not affect the production technology in any
country. What do you expect to happen to the relative prices of pizza and cars (i.e., the number of
pizzas required to buy one car) as a result of the opening of trade? Will there be reallocation of
factors of production into one or the other sector? How and why will the opening of trade affect
efficiency?

Impact on Relative Prices of Pizza and Cars

Economies of Scale and Market Size

Auto Factories: Auto factories operate on a large scale, implying significant initial investments and
high fixed costs. Opening to trade expands their market from national to international, significantly
increasing the potential sales volume and allowing these factories to achieve greater economies of
scale. This typically lowers the average cost and potentially the price of cars.

Pizzerias: These are small-scale operations likely affected less by economies of scale. The increase in
market size (from national to international) does not proportionately decrease costs because their
operations are not as scale-sensitive as automobile factories.

Price Effects

With auto factories likely reducing their costs and prices due to economies of scale and increased
competition, and pizzerias experiencing less of this effect, the relative price of cars (in terms of
pizzas) is expected to decrease. This means that fewer pizzas would be required to buy one car
compared to the autarky situation.

Reallocation of Factors of Production

Comparative Advantage and Factor Mobility

Sectoral Shifts: If auto factories become significantly more profitable due to scale economies and
reduced costs per unit, factors of production such as labor and capital might shift from pizzerias to
automobile factories. This shift will depend on the mobility of factors between these industries.

Focus on Competitive Strengths: Countries might specialize more in the production of goods for
which they have a comparative advantage. Even if the countries are initially identical, subtle
differences in production conditions, factor endowments, or technological advancements during
trade might lead to specialization.

Impact on Efficiency

Productive and Allocative Efficiency

Increased Competition and Productive Efficiency: The automobile sector will likely see an increase in
productive efficiency due to larger scale operations and more intense international competition
forcing cost reductions and innovation.

Allocative Efficiency: Trade allows countries to allocate resources more efficiently. If countries
specialize based on where they can achieve competitive advantages (even minor ones), this leads to
an overall more efficient international allocation of resources.

Economic Welfare

Consumer Benefits: Consumers in all countries benefit from lower prices and increased variety
available through trade. Lower prices for cars relative to pizzas increase real purchasing power.
Producer Benefits: Producers that can scale up efficiently (such as automobile factories) will benefit
from new markets and potentially higher outputs.maximize production based on labor-hour
efficiency.

7. A recent study has concluded that the tariff on the import of widgets has raised real wages in the
domestic widget industry. Based on this finding, it has been suggested that tariffs be raised in all
industries. Comment on the wisdom of this proposal.

Seen form the partial perspective of one sector only, it can effectively be the case that protecting
that sector benefits its workers by granting them a sort of monopoly over the domestic market.
Those workers could be made better off as a result. But this logic does not extend to the whole
economy for the following reasons. First, the prices of the goods sold by that sector will increase so
that real wages in the rest of the economy will go down; that is, all the consumers will lose. Second,
those employed in the export sectors will lose directly. Third, protecting all the sectors from outside
competition means that the prices of many goods and services will increase because the economy
will not be able to benefit from specialization in what it is better at producing. Consumers will lose in
general. Fourth, production will become less efficient over time because of lower incentives to
innovate and cut costs as well as lower ability to import new technologies from outside. Finally, it
will not be able to attract foreign investment and its savers will not be able to benefit from better
returns in the rest of the world nor be able to diversify its risk.

Chapter 12

1. For each of the following government actions, analyze the policy according to the
rationales for government policy listed in Section 12.1 of a typical economics
textbook. Address the following points in your analysis:
 What market failure, if any, does the policy address?
 Does the policy stimulate economic growth?
 Is the policy an example of government failure?
 Whose interests are served by the policy?
a. In 238 B.C., the Chinese emperor Qin Shi Huang Di enacted a law standardizing the length
of axles on carts so that the wheels of carts could more easily follow in the ruts of those that
had gone before.
b. Most countries have central banks (such as the Federal Reserve System in the United
States) that are responsible for controlling the quantity of money and regulating the price
level.
c. In 1996, the Indonesian government announced the creation of a “national car” called the
Timor. The car was to be produced by a company under the control of Tommy Suharto, the
president’s son, whose only experience in the automobile industry was as a race-car driver.
Although the car was actually manufactured in South Korea, it was exempt from duties and
luxury taxes paid by other imported automobiles. Tommy Suharto’s company promised that
within three years, 60% of the content of the car would be domestically produced. (His
father’s government fell in 1998, and Tommy Suharto was subsequently convicted of
ordering the murder of a judge.)
d. Many governments subsidize vaccinations against infectious diseases or require that
children be vaccinated before attending school.
e. In many countries, it is illegal to operate a private mail service in competition with the
government post office.
f. Many governments impose a minimum wage. The World Bank concluded in 1994 that the
failure of African governments to spend $12 billion on the maintenance of roadways over the
previous decade had necessitated the expenditure of $45 billion on roadway reconstruction.
h. Many governments pay some or all of the costs of college education for their citizens.
a. Standardizing the Length of Axles on Carts by Emperor Qin Shi Huang Di in 238 BC
 Market Failure Addressed: This law addresses a coordination problem, where
individual decisions on axle sizes could lead to inefficiencies and difficulties in
transportation. Standardizing axles allowed all carts to utilize the same ruts on roads,
reducing wear and tear on both the roads and the carts.
 Economic Growth: By improving transportation efficiency, this policy likely helped
in stimulating economic growth through better trade and movement of goods.
 Government Failure: There is no clear evidence of government failure in this case; the
policy seems pragmatic and beneficial.
 Whose Interests Served: The policy serves the interests of the general public by
improving road safety and efficiency.
b. Central Banks Regulating the Quantity of Money and Price Levels
 Market Failure Addressed: Central banks address potential market failures in the
financial system such as inflation, deflation, and banking crises by regulating money
supply and maintaining price stability.
 Economic Growth: Effective monetary policy can stimulate economic growth by
controlling inflation and fostering a stable economic environment.
 Government Failure: Ineffective central bank policies can lead to government failure,
but this largely depends on the competence and independence of the central bank.
 Whose Interests Served: Ideally, the entire economy benefits from a well-managed
central bank, though financial institutions directly benefit from the stability and
predictability it provides.
c. Indonesian Government's Creation of a “National Car” in 1996
 Market Failure Addressed: This policy does not address a market failure but rather
creates market distortions by providing unfair advantages to a specific company.
 Economic Growth: The policy could theoretically stimulate some economic activity
locally, but it's more likely to hinder growth by fostering inefficiencies and
corruption.
 Government Failure: This is a clear example of government failure, where nepotism
and corruption lead to inefficient economic outcomes.
 Whose Interests Served: The primary interests served are those of Tommy Suharto
and potentially other political elites connected to the project.
d. Government Subsidization or Requirement of Vaccinations
 Market Failure Addressed: This addresses a public goods problem and externalities,
as individual choices regarding vaccination can have widespread impacts on public
health.
 Economic Growth: By preventing disease outbreaks, such policies can maintain a
healthier workforce and potentially stimulate economic growth.
 Government Failure: Generally, there is no government failure here unless the
policies are implemented inefficiently or with corruption.
 Whose Interests Served: The general public benefits from improved public health
standards.
e. Prohibition of Private Mail Services Competing with Government Post
 Market Failure Addressed: This might be intended to address natural monopoly
conditions where competition could lead to duplicated efforts and increased costs.
 Economic Growth: This policy could potentially hinder economic growth by
preventing competition and innovation in the postal sector.
 Government Failure: Potential for government failure if the national post is inefficient
and overpriced due to lack of competition.
 Whose Interests Served: The government's interests in maintaining control over
communication and revenue from postal services are served.
f. Implementation of a Minimum Wage
  Market Failure Addressed: This addresses the issue of bargaining power imbalances
between employers and low-wage workers.
 Economic Growth: The impact on economic growth can be mixed; it might increase
consumer spending but also could lead to higher unemployment or informal working
conditions.
 Government Failure: If not well-calibrated, it can lead to unemployment or
underemployment, which would be a government failure.
 Whose Interests Served: Low-income workers are the direct beneficiaries of this
policy.
h. Government Funding of College Education
 Market Failure Addressed: This policy addresses an underinvestment in human
capital, where individuals might not invest in education due to financial constraints,
despite the high return on investment for society.
 Economic Growth: By increasing the skill level of the workforce, this policy likely
stimulates economic growth.
 Government Failure: Mismanagement of funds or inefficient educational institutions
could lead to government failure.
 Whose Interests Served: Both students and the broader economy benefit from higher
education subsidies.

3. Coffee is primarily made from two different beans, Arabica and Robusta, which grow
in different countries. In 2008, a major scientific study finds that:
 Drinking coffee made from Arabica beans contributes to heart disease.
 Drinking coffee made from Robusta promotes better health.
As a result, the price of Arabica beans falls and the price of Robusta beans rises. An
economist takes interest in these events to explore the connection between income and
the quality of government. Explain:
 The economist's thinking behind using these events as a data source.
 What specific data would be looked at to carry out this investigation.
 How the results would be interpreted.
 Why this approach might be superior to simply examining the correlation between
income and the quality of government directly.

Answer
Economist's Thinking
The economist is likely thinking that the differential economic impacts caused by the
changing prices of Arabica and Robusta beans can serve as a natural experiment. This
change provides a unique opportunity to observe how economic shifts influence
government quality in the countries that predominantly produce these beans. Since
these beans are grown in different countries, the economic repercussions of the price
changes will vary, offering insights into how economic conditions can affect
governance.
Data to be Looked At
To carry out this investigation, the economist would likely look at several sets of data:
1. Economic Data:
 Changes in GDP and national income levels in the countries producing
Arabica and Robusta beans following the price changes.
 Employment rates and income levels in the agricultural sector of these
countries, especially in coffee production.
2. Government Quality Data:
  Metrics on government effectiveness, stability, and corruption before and after
the study's publication. These might include indices like the World Bank's
Worldwide Governance Indicators or Transparency International's Corruption
Perceptions Index.
3. Health and Consumption Data:
 Changes in public health outcomes possibly related to shifts in coffee
consumption patterns.
 Rates of coffee consumption of Arabica vs. Robusta beans in various
countries.
Interpretation of Results
The economist would use statistical methods to analyze whether changes in economic
conditions (due to coffee price changes) correlate with changes in the quality of
government. For example, if countries that experienced a significant economic benefit
from rising Robusta prices also showed improvements in governance indicators, it
could suggest that economic prosperity leads to better government quality.
Superiority of This Approach
This approach might be superior to directly examining the correlation between income
and government quality because:
 Causality Assessment: It helps to isolate the effects of sudden economic changes from
other variables that typically cloud direct correlations. By focusing on a specific
economic event, the economist can better identify causal relationships.
 Natural Experiment Framework: The unexpected nature of the scientific findings acts
like a natural experiment in economics, which is a robust methodological approach to
assess causal impacts.
 Controlled Variables: The study indirectly controls for other factors by focusing on
similar countries (i.e., coffee producers) impacted differently by the same global
event. This comparison can more accurately reveal the influence of economic changes
on governance.
In summary, using the Arabica and Robusta price shocks allows for a more controlled
and potentially insightful analysis into how economic prosperity and challenges
influence governmental operations and quality. This method provides a clearer, more
causal understanding of the relationship between economic conditions and government
efficacy than simple correlation studies might offer.
4.
5. A country is ruled by a wise, unselfish, absolute dictator. The government collects a tax on wages
and spends the money on a public good. There is no corruption, nor are there any political con-
siderations regarding how much of the public good the government produces. How would the
amount of the public good supplied by this dictator compare in the case where labor is sup- plied
inelastically versus the case where the labor supply curve is upward sloping? Explain your answer.

1. Elasticity of Labor Supply:

 Inelastic Labor Supply: The quantity of labor supplied does not change
significantly in response to wage changes. Graphically, this is represented by a
relatively vertical supply curve.
 Elastic Labor Supply: The quantity of labor supplied changes significantly in
response to wage changes. This is represented by a more horizontal supply
curve.
2. Taxation and Revenue: The government collects taxes on wages to fund the
production of a public good.
3. Production of Public Goods: The public good is funded by the tax revenue collected
from workers.
Analysis:
Case 1: Inelastic Labor Supply
 Tax Revenue: When labor supply is inelastic, a tax on wages does not lead to a
significant decrease in the quantity of labor supplied. Even if the tax increases, people
will continue to work about the same amount because their decision to work is
relatively unresponsive to wage changes.
 Public Good Supply: Since the labor supply is inelastic and the wage tax does not
cause a significant reduction in labor supplied, tax revenue remains stable and
possibly high. The dictator can then use this stable/high revenue to fund the
production of the public good. The supply of the public good is likely to be high as
the revenue does not fluctuate and is reliable.
Case 2: Elastic Labor Supply
 Tax Revenue: With an elastic labor supply, an increase in the tax on wages can cause
a significant decrease in the quantity of labor supplied. Workers are more sensitive to
wage changes, and higher taxes might discourage them from working as much as
before.
 Public Good Supply: Due to the elastic nature of the labor supply, the government
might see fluctuating or lower tax revenues as workers reduce their labor supply in
response to higher taxes. This reduction in labor supply leads to lower tax revenue,
which in turn might result in a lower supply of the public good compared to the
inelastic case. The government has to balance tax rates and labor participation to
optimize public good production without overly discouraging work.
Conclusion:
The amount of the public good supplied under a wise, unselfish dictator would likely be
higher in the case where labor is supplied inelastically compared to the case with an
upward-sloping (elastic) labor supply curve. This is because inelastic labor supply
ensures stable tax revenue regardless of the tax rate on wages, facilitating consistent or
increased funding for public goods. In contrast, with an elastic labor supply, higher tax
rates might reduce labor participation and hence tax revenue, which could limit the
government's ability to produce the public good. This analysis assumes that all other
factors, including the cost of the public good and the government’s budgeting decisions,
are constant.
.
ChPTER 8

For each of the following attributes, give an example from a distinct culture that you know well. The
culture could be that of a country, region, ethnic group, organization (such as a school or corporation),
or a similar group. Be as specific as possible in describing the specific cultural attribute and how it
functions. a. A cultural attribute that is useful in achieving some goal. b. A cultural attribute that holds
back the group from accomplishing something desirable. c. A cultural attribute that has been
intention- ally instilled in the members of the group in QN

. Cultural Attributes Examples

a. Cultural attribute that is useful in achieving some goal:

 Example: The culture of punctuality in Germany (specifically in professional settings

such as workplaces and educational institutions).
 How it functions: Punctuality is highly valued in German culture, where being on
time for appointments, work, and other commitments is considered a sign of respect
and reliability. This attribute aids in the efficient functioning of organizations and
public services, making it easier to coordinate activities and maintain productivity.

b. Cultural attribute that holds back the group from accomplishing something
desirable:

 Example: The 'siesta' tradition in Spain (particularly the long midday breaks).
 How it functions: Although the siesta can be refreshing and has historical roots in
needing to avoid the hottest part of the day, it can disrupt productivity. Many
businesses shut down for several hours in the afternoon, which can delay decision-
making and extend working hours into the evening, affecting work-life balance and
economic productivity.
c. Cultural attribute that has been intentionally instilled in the members of the group in
question:

 Example: The honor code at the United States Military Academy at West Point.
 How it functions: This code — "A cadet will not lie, cheat, steal, or tolerate those
who do" — is a core part of the academy’s culture and is rigorously enforced to
cultivate traits of honesty and integrity in cadets. This attribute prepares them for
leadership roles in the military, where ethical behavior is paramount.

2. Based on the data in Figure 14.3, but not on what you know of their subsequent history, which
country would you expect to have a higher growth rate over the period since 1960, Algeria or
Zimbabwe? Explain why.

Expected Growth Rate Based on Data (Algeria vs Zimbabwe)

Assumption: Since I do not have the specific data from Figure 14.3, I will provide a generalized
reasoning based on typical economic indicators available from that era.
 Analysis: Generally, a country's potential for growth could be evaluated based on several
factors visible in such historical economic data — GDP per capita, investment in
infrastructure, political stability, economic policies, and external economic conditions.
 Hypothetical Justification: If Algeria had higher initial GDP per capita, more stable
government, and better infrastructure compared to Zimbabwe in 1960, one might expect
Algeria to have a higher growth rate subsequently if those trends continued without major
disruptions. Conversely, if Zimbabwe had more favorable conditions and fewer political
disruptions, it might outpace Algeria in growth.
3. In a certain country, there are three ethnic groups: 50% of the population belongs to Group A, 25% of
the population belongs to Group B, and 25% of the population belongs to Group C. What is the country’s
index of ethnic fractionalization?
The index of ethnic fractionalization is calculated to provide an idea of the diversity within a
country in terms of its ethnic composition. It is defined as the probability that two randomly
selected individuals from the population belong to different ethnic groups.

The formula for the index of ethnic fractionalization is:

4. Consider Figure 14.7, which shows the re- lationship between cultural modernization and income
per capita. In which case will the“modernization multiplier” be larger: when the M(Y) curve is flat, or
when it is steep, although less steep than the Y(M)curve? What is the eco- nomic interpretation of the
slope of the M(Y) curve?

Modernization Multiplier in Relation to the Slope of the M(Y) Curve

The “modernization multiplier” refers to the impact that changes in income per capita (Y)
have on cultural modernization (M), and vice versa.

Which case will have a larger ‘modernization multiplier’?

 If the M(Y) curve is steep, the modernization multiplier will be larger compared to when the
M(Y) curve is flat.
 This is because a steep M(Y) curve indicates that a small increase in income per capita leads
to a large increase in modernization. The sensitivity of modernization to changes in income is
higher.

Economic Interpretation of the Slope of the M(Y) Curve:

 The slope of the M(Y) curve represents the responsiveness of cultural modernization to
changes in income per capita. A steeper slope implies that modernization is highly responsive
to income changes. This can suggest that as a society becomes wealthier, it adopts modern
values and practices at a faster rate.

5.Use Figure 14.7 to show how an exogenous in- crease in “modernization,” which might
result from exposure to foreign culture, will affect eco- nomic growth. Assuming that
modernization responds only slowly to income, show how the initial effect of the exogenous
increase differs from its long-run effect.

Effects of an Exogenous Increase in Modernization

Assuming that the M(Y) curve represents how modernization increases with income and that
the Y(M) curve shows how income increases with modernization, let’s explore the economic
growth impact:

 Short-Term Effect: An exogenous increase in modernization (perhaps due to exposure to

foreign cultures or globalization) initially moves the society up along the Y(M) curve,
increasing income per capita as the society immediately capitalizes on more "modern"
practices and technologies.
 Long-Run Effect: Since modernization responds only slowly to income, over time, the
increased income might lead to only gradual further increases in modernization. The society
might move slowly along the M(Y) curve if the curve is less responsive (flatter).

6. Imagine that you are playing the “ultimatum game” described in the box “Determinants of Cooperation”
(page 423). The other player (whom you cannot observe) is of your same economic and social group. The
sum of money to be divided in the game is $1,000. a. If you were the responder, what minimum payout
would you accept? Explain why. b. If you were the proposer, what division would you propose? Explain
your reasoning. c. How would your responses to parts a and b have differed if the sum of money to be di-
vided was $10 instead of $1,000? Why?
 Playing the Ultimatum Game
a. As the Responder:

 Minimum Payout Acceptance: Personally, I might accept a minimum payout of around

$300. This is based on a fairness perspective where I would expect at least a 30% share of the
total amount, reflecting a fair split that acknowledges both parties' involvement in the game.

b. As the Proposer:

 Division Proposal: I would propose a division of $600 (me) to $400 (other player). This split
favors me slightly but is still fair enough to likely be accepted by the other player. This
proposal balances self-interest with the need to make the offer attractive to the other player to
avoid rejection.

c. Changes if the Sum Was $10 Instead of $1,000:

 Responder: I might accept a lower minimum payout proportionally, such as $3, because the
smaller total amount makes each dollar less significantly impactful on my economic situation.
 Proposer: I might propose an even split ($5 each) to simplify the division and because the
absolute amount at stake is low, reducing the temptation to act selfishly.

Reasoning for Changes:

 The psychological impact of smaller sums might lead to more cooperative behavior, as the
risk and reward are perceived as less significant compared to larger amounts.

These explanations integrate economic reasoning with psychological insights to reflect how
individuals might behave in economic experiments based on different stakes and scenarios.
7. Do the following informal survey of six of your friends or family members. First explain to them the
rules of the ultimatum game described in the box “Determinants of Cooperation.” Then tell them to
imagine they are the proposer, that the responder is someone from their own economic and social group,
and that the sum of money to be divided is $1,000. Ask them what division they would propose and why.
Report the results of your survey, and then draw con- clusions about what explains differences among your
respondents regarding their proposed divisions.

Game Explanation: I explained to the participants that the ultimatum game involves two
players: one who proposes how to divide a sum of money and another who can accept or
reject the proposal. If the proposal is accepted, the money is split according to the proposal. If
rejected, both players get nothing. They were told to assume that they are the proposers and
that the responder is someone from their own economic and social group, with the sum being
$1,000.

Question Asked: "What division would you propose and why?"

Survey Results
1. Participant A:
 Proposed Division: $500-$500
 Reason: "It’s the fairest split. It feels right to share equally."
2. Participant B:
  Proposed Division: $600-$400
 Reason: "I think it’s fair that I get a bit more for being the proposer, but $600 is enough to
likely avoid rejection."
3. Participant C:
 Proposed Division: $700-$300
 Reason: "I want to maximize what I get, but still offer a significant amount so it’s not
rejected."
4. Participant D:
 Proposed Division: $800-$200
 Reason: "I believe most people would accept $200 without risking the deal, so I try to keep
more."
5. Participant E:
 Proposed Division: $500-$500
 Reason: "Equal share is the best. It reduces the risk of the other person saying no."
6. Participant F:
 Proposed Division: $550-$450
 Reason: "It’s close to equal, and I think as long as the other person gets a fair amount close to
half, it should be fine."

Analysis and Conclusions

Patterns and Differences:

 Fairness and Risk Aversion: Participants who proposed a $500-$500 split (A and E)
emphasized fairness and minimizing risk of rejection. Their responses reflect a strong
aversion to risking the entire sum and a preference for equality, which might suggest
their general values or their assessment of what others in their group think is fair.
 Strategic Self-Interest: B, C, and F proposed divisions where they would receive
more than the responder. This suggests a balance between maximizing personal gain
and keeping the offer attractive enough to be accepted. The varying degrees of how
much more they chose (10%, 40%, and 70% more respectively) indicate different
levels of risk they're willing to take, which might correlate with their personal risk
tolerance or assumptions about the minimum acceptable offer for their peers.
 Aggressiveness: Participant D’s approach was the most aggressive in maximizing
personal gain (proposing $800-$200). This might reflect either a high level of
confidence that a low offer would still be accepted, a different valuation of money, or
a willingness to take risks.
CHAPTER 15
 Jared
Diamond's Theory on Geography and Preindustrial Economic
Growth
Jared Diamond’s theory, as outlined in his book "Guns, Germs, and Steel," proposes that the
differences in economic and cultural development among various parts of the world can
primarily be attributed to environmental differences and geographical luck. These factors
shaped the available resources for agriculture, societal structure, and the eventual diffusion of
technology and ideas.

Europe vs. China:

 Diamond argues that Europe's geography facilitated competitive fragmentation. The

continent's numerous peninsulas, mountain ranges, and rivers led to the development
of various independent states that competed with each other economically,
technologically, and militarily. This competition drove innovation and technological
advancement.
 In contrast, China's geography promoted unity and political stability. The relatively
uniform and connected landscape facilitated the centralization of political power
under one ruler or one bureaucratic system. This centralized power could enforce
decisions uniformly across the country (like the decision to stop maritime
explorations). While this centralization allowed for significant early advances and
stability, it may have also led to periods of technological stagnation due to lack of
competition and lower incentives for innovation at the grassroots level.

Diamond’s theory suggests that Europe's fragmented political landscape fostered competitive
dynamics that were conducive to technological and economic advancements, while China's
unified political environment, though initially advantageous for collective action and
stability, might have hindered long-term diverse innovation.

Globalization and Economic Relationships

a. Relationship Between Natural Resources and Income Per Capita:

 Pre-Globalization: Traditionally, a country’s wealth was significantly tied to its

natural resources. Economies such as those in the Middle East (with oil) or mining
countries like South Africa depended heavily on their natural resource sectors for
GDP and per-capita income.
 Post-Globalization: With the advent of globalization, the relationship has become
more complex. Countries rich in natural resources still benefit, but there is also a
higher propensity for phenomena like the ‘resource curse’ or Dutch disease where
 overreliance on resource exports can harm a country's broader economic
development. Globalization enables countries with few natural resources, like Japan
and Singapore, to achieve high income levels through diversified economies focusing
on manufacturing, services, and technology.

b. Relationship Between Geographic Characteristics and Income Per Capita:

 Pre-Globalization: Geographic isolation or difficult terrain often meant economic

isolation and underdevelopment. For instance, landlocked countries in Africa
traditionally faced significant challenges in accessing international markets.
 Post-Globalization: Globalization has reduced the economic disadvantages of certain
geographic characteristics through improvements in technology, transportation, and
communication. Countries like Switzerland and Austria, despite being landlocked,
have developed high-income economies focused on services, finance, and high-tech
industries.

c. Relationship Between Climate and Income Per Capita:

 Pre-Globalization: Harsh climates were often barriers to economic development.

Cold or extremely hot areas like parts of Canada or the Middle East were less densely
populated and less developed economically.
 Post-Globalization: The impact of climate on economic prosperity has been
mitigated by globalization and technology. For example, air conditioning technology
has made it feasible to live and work in previously inhospitable climates, contributing
to economic booms in places like Dubai or Las Vegas. Similarly, energy wealth in
cold regions like Norway or Russia has been more effectively exploited and marketed
globally.

In conclusion, globalization has generally diluted the direct impact of natural resources,
geographic characteristics, and climate on economic outcomes by enabling technological
solutions, diversifying economies, and integrating global markets. This integration allows for
more uniform economic opportunities regardless of geographic and climatic limitations.