ECONOMIC DEVELOPMENT LABOR AND HUMAN CAPITAL: CH' 10

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ECONOMIC DEVELOPMENTLABOR AND HUMAN CAPITAL
CH. 10

• QUESTION 1 In a market economy how are wages
  determined?

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Wage (/day) Labor Market for Industrial
Workers
Labor Supply Curve
Labor Demand Curve
0 100 200 300 400 500 600 Quantity of Labor
(millions of days)
The labor supply curve reflects the opportunity
cost of workers (i.e. the value of their time if
it was spent in their next best activity).
The labor demand curve reflects the marginal
revenue product of labor (i.e. the extra received
from hiring one more worker).
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Source UNDP, Human Development Report 1997
(Oxford Univ. Press) J. Allen, Student Atlas of
Economic Development (Dushkin/McGraw-Hill) and
The World Bank, World Development Report
1996(Oxford Univ. Press)
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QUESTION 2It is estimated that the tuition and
fees paid by Cal Poly students only covers
one-fourth of the education cost per student.
Who pays the other three-fourths of the cost of a
Cal Poly education? What is the economic
justification for students to receive such a
large subsidy to pay for their university
education? How can we use economic principles to
determine the efficient level of education
subsidies?
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The Benefits and Costs of a Young Persons
Education

MSBMPBMEB MSCMPC
MPB
0 2 4 6 8 10 12
14 16 18 20 Years of
Education
From the perspective of society the efficient
level of education is the point at which the
MSBMSC.
From the perspective of the individual student
the best level of education is the point at
which the MPBMPC.
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MORE QUESTIONS QUESTION 3 The governments of
most LDCs have a hard time raising funds for
worthwhile projects and investments. Given the
shortage of money and resources difficult
decisions must be made concerning the allocation
of funds for education. Suppose you are the
education minister for an LDC faced with making
this difficult decision. Draw up a list of the
types of education programs that you believe
should receive priority. Rank the education
programs on your list from the top priority to
the lowest priority. The Prime Minister will
evaluate your priorities before he approves your
budget so be prepared with an explanation that
supports your decisions.
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QUESTION 4 Suppose you are the Minister of
Industrial Planning for an LDC. Your country is
developing a textile manufacturing industry.
Textiles can be produced with a capital-intensive
technology or a low-tech labor-intensive
technology. Assume the capital-intensive
technology is more efficient, that is it produces
textiles at a lower cost compared to the
labor-intensive technology. However the
capital-intensive technology also results in
greater unemployment compared to the
labor-intensive technology. Consider the
tradeoff between these two different technologies
. Which technology would you support? Make a
list of the arguments you will use when you go
before the Prime Minister and make your
recommendation.
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QUESTION 5 What is meant by the term reverse
foreign aid? Does the United States receive a
significant amount of this type of aid? What
policies can be adopted to reduce the problems
resulting from this reverse flow of aid?