Question Homework #2 Eco333 Answers Due Nov 27th 3:15 pm (submit through Blackboard). You may

03 Jun Question Homework #2 Eco333 Answers Due Nov 27th 3:15 pm (submit through Blackboard). You may

QuestionQuestion
Homework #2

Eco333

Answers Due Nov 27th 3:15 pm (submit through Blackboard). You may
Homework #2

Eco333

Answers Due Nov 27th 3:15 pm (submit through Blackboard). You may

work on the homework in groups up to 3. If you work in groups, please

submit just one copy but put the 2 or 3 names on top of the Örst page clearly

visible.

For exercises that have blanks (_____), Öll each blank with a single

word or number. For exercises with ellipses (. . . ), complete the statement

with as many words as necessary. For exercises with words in square brackets

([increase, decrease]), circle one of the words.

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1 Homework Questions

Question 1

Serena is the urban economic developer of a Canadian city. She is considering

whether or not to make a proposal to develop a diverse economy with

a large number of industries. Her assistant (who took ECO 333) just sent

her a report on the empirical evidence concerning the magnitudes of localization

and urbanization economies. The report focuses on the productivity

advantages from agglomeration. Based on the report only, what should she

do?

Question 2

2Consider an empire divided in 2 regions, Etruria (E) and Gallia (G). The

emperor does not allow any worker mobility between region E and region

G. Region E has a Öxed population of 13 million. The urban utility curve

reaches the maximum utility with 6.5 million people, and initially there are

two cities, Faesulae (F) and Volsinii (V), each with 6.5 million people. At

time t, City F and city V are identical in every respect.

a. Focus on Region E. Suppose that at t+1 the emperor names city

F the capital of the empire and starts to provide free music concerts in F,

Önanced by coersive transfer payments from people in region G. Using the

graph of the urban utility curve, show the e§ect of the free concerts on the

urban utility curve in city F. When drawing the graph, assume that the positively

sloped portion of the urban utility curve is steeper than the negatively

sloped portion (this is the standard case we have extensively discussed in

class). Also assume the utility-maximing population does not change from

time t to time t+1.

b. People will migrate from city _______ to city _______ because.

. . . . . . . .

c. As a consequence of these migration áows utility in city F [increases/decreases],

and utility in city V [increases/decreases]

d. How does the new equilibrium in region E look like? In particular,

what is the level of population in city F?

Question 3

A developing nationís workforce of 30 million is divided equally between

a city and a rural area. The initial common utility level is $50, see below:

3City

Rural

10 15 (population)

U

The slope of the urban utility curve, between 10 to 15 million is -$2, while

for the rural curve between 15 and 20 million is -$1. Suppose a populist

government increases rural expenditure (invests in agriculture) which has a

positive e§ect on utility in rural areas for the same population. Short term

utility in rural areas at the equilibrium population rises to $56.

i) What is the impact of this policy on the distribution of rural and

urban population? What is itís impact on the utility of rural and urban

living?

ii) If the government instead did the opposite; invested in infrastructure

in urban areas rather than the rural area raising itís utility at the equilibrium

size to $56, what is the impact now on the distribution of rural/urban

population and utilities?

Question 4

Consider a region with 2 export products (saxophones and soccer balls)

and 2 local goods (haircuts and music concerts). The production of each

export good is subject to localization economies, so each city specializes in

one export good. According to the urban economist Grace Slick ìIf my two

assumptions (one for export products and one for local goods) are correct,

4all the cities in the regions will be the same sizeî. Assume that Slickís logic

is correct. List her assumptions and explain why together they imply the

regionís cities will have the same size.

Question 5

Complete the statement: Vancouver provides specialized cultural, legal,

medical, Önancial, and other services that are not available in small urban

areas in the rest of British Columbia because these specialized service are

characterized by. . . .

Question 6

Density of economic activity and local productivity: Local Spillovers

from Foreign Direct Investment in Ethiopia

Recall the discussion in class on the relation between the density of economic

activity and local productivity. In this question you are asked to

think of this relation in a developing country context. The background for

this question draws heavily on research on foreign direct investment (FDI) in

Ethiopia by the following team of researchers: Margaret McMillan (Tufts),

Justin Lin (CCER), Deborah Brautigam (John Hopkins University), Xiaobo

Zheng (IFPRI) Bart Minten (IFPRI), Alemayehu Seyoum Ta§esse (IFPRI),

and Girum Abebe (EDRI). Below you Önd some suggestions for background

readings.

In the past few years, a major destination for Asian and European Örms

has been sub-Saharan Africa. More speciÖcally, the Ethiopian leather shoe

manufacturing industry has seen dramatically greater foreign investment

since 2004 (in particular from Chinese and Indian Örms). However, relatively

little is known about whether these Örms are operating in isolation or

integrating their operations, technology, and skills with Ethiopian Örms and

people.

From a policy perspective, it is important to collect information on the

interactions between foreign investors and Ethiopian entrepreneurs to assess

5ways in which cooperation can be facilitated. This type of information could

be used to target the most desirable partnerships. If this is not done, the

risk is that Ethiopians become discouraged and outright hostile to foreign

investors. Ultimately this could reduce the attractiveness of Ethiopia as a

destination for foreign investment.

Suppose you just joined a research team whose goal is to conduct an

original survey of Örms in the Ethiopian leather shoe manufacturing industry

in order to shed light on the interaction between Ethiopian and foreignowned

Örms, and on the micro-mechanisms behind potential productivity

advantages of domestic Örms from being located close to large greenÖeld

investments by foreign companies.

YOUR TASKS in this question are:

list the questions you would ask to shed light on the main dimensions

of interest listed below

explain brieáy why you think the questions you chose are relevant. The

readings by Javorcik on foreign direct investment in Czech Republic and

Latvia, by Charlot and Duranton on French cities, and Kadokawa on

Japan, and my study on the Veneto region of Italy suggested below

would be helpful for your task (though they are not necessary).

The main dimensions of interest are:

1. Spillovers to Upstream Sectors, for instance: (a) types of changes required

by foreign-owned Örms from local suppliers (which enhance the

productivity of local Örms), (b) Improvements actually undertaken by

local Firms in Order to Supply a foreign-owned Örm.

2. Types of Assistance Received by Ethiopian Suppliers from foreign Customers

3. Knowledge Spillovers/Communication externalities

64. Knowledge transfer through labor mobility from foreign-onwed Örms to

Ethiopian Örms

5. Location choice by recently established Ethiopian Örms and in particular

whether and how the choice is a§ected by the presence of large

foreign greenÖeld projects

Main References (and some more backround readings if you are

curious)

Charlot, Sylvie, and Gilles Duranton. 2004. ìCommunication externalities

in cities.îJournal of Urban Economics, 56(3): 581ñ613.

Javorcik, Beata S. 2008. ìCan survey evidence shed light on spillovers

from foreign direct investment?îThe World Bank Research Observer,

23(2): 139ñ159.

Kadokawa, Kazuo. 2011. ìApplicability of Marshallís Agglomeration

Theory to Industrial Clustering in the Japanese Manufacturing Sector:

An Exploratory Factor Analysis Approach.îJournal of Regional

Analysis and Policy, 41(2): 83ñ100.

SeraÖnelli, Michel “Good Firms, Worker Flows and Local Productivity”

Mimeo, University of California, Berkeley

you can download it from my website https://sites.google.com/site/michelseraÖnelli/

Blog China in Africa: The Real Story

http://www.chinaafricarealstory.com/

Article in Financial Times ëThis is Africaí: Africaís quiet agricultural

revolution

http://www.thisisafricaonline.com/Development2/Africa-s-quiet-agriculturalrevolution

7 Chinese FDI in Ethiopia: a World Bank survey

http://documents.worldbank.org/curated/en/2012/11/17073974/chinese-fdi-ethiopiaworld-bank-survey

Presentation by McMillan on Ethiopiaís Leather Industry, Preliminary

Findings

http://goo.gl/0jh3lU

8