(a) Explain Rosenstein-Rodan's view that economic underdevelopment is the outcome of a massive coordination failure. (10…

(a) Rosenstein-Rodan's coordination failure. In his 1943 paper, Rosenstein-Rodan argued that underdevelopment is a low-level equilibrium in which investments that would pay together do not pay singly. He cited three indivisibilities: in the production function (lumpy social overhead capital such as power and transport), in demand (complementarity of markets) and in the supply of savings (a minimum effort is needed to raise the saving rate). The demand indivisibility is central: a lone shoe factory cannot sell its output because its own workers' wages are too small to buy it, but a simultaneous set of industries, each employing workers who buy one another's products, creates a market for all. Private investors do not internalise these pecuniary externalities, so each waits, and private profit falls short of the social return. A coordinated, state-planned "big push" of investment is therefore needed to move the economy to a high-level equilibrium. Murphy, Shleifer and Vishny (1989) later formalised this as multiple equilibria.

(b) Gender-sensitive HDI. The Gender Development Index (GDI) is built by computing the HDI separately for women and men and taking their ratio, GDI = HDI_F/HDI_M. Each index uses the three HDI dimensions with gender-disaggregated data: health, life expectancy at birth (with separate goalposts for women and men to allow for women's biological advantage); education, expected years of schooling and mean years of schooling of adults; and standard of living, GNI per capita estimated separately for women and men from their shares of earned income, using wage ratios and shares of the economically active population. Each dimension index is computed against fixed goalposts, and the geometric mean of the three gives HDI_F and HDI_M. A GDI of 1 means parity. The pre-2010 GDI instead penalised gaps through an inequality-aversion parameter, ε = 2. The related Gender Inequality Index (GII) measures reproductive health, empowerment and labour-market participation, and replaced the earlier Gender Empowerment Measure.

(c) Economic integration and covered interest parity. CIRP states that F/S = (1 + i_d)/(1 + i_f), where S and F are the spot and forward rates in domestic currency per unit of foreign currency; the forward premium on the foreign currency approximately equals the interest differential. It holds through covered arbitrage: if F/S < (1 + i_d)/(1 + i_f), an investor borrows abroad, buys domestic currency spot (S falls), invests at i_d and sells domestic currency forward (F rises), earning a riskless profit until the gap closes. This process needs integrated markets: free capital mobility without controls, no transaction costs, taxes or restrictions on spot and forward trading, deep forward markets in both currencies, and assets comparable in risk and maturity, with negligible default or political risk. Where economies are not integrated, as in India before the 1990s capital-account liberalisation, arbitrage is blocked and the forward rate can depart from the parity value. Hence integration is a prerequisite for CIRP.

(d) Real exchange rate and terms of trade. The real exchange rate is RER = E·P_f/P_d, the price of foreign goods in terms of domestic goods, where E is domestic currency per unit of foreign currency. The terms of trade are TOT = P_x/P_m. In general they differ, because the RER involves whole price levels, including non-tradables, while the TOT involves only traded goods. They coincide, as inverses, when the world has two countries and two goods; the home country produces only what it exports (P_d = P_x) and the foreign country produces only what the home country imports (E·P_f = P_m); and there are no non-tradables, trade barriers or transport costs, so the law of one price holds. Then RER = P_m/P_x = 1/TOT: a deterioration in the TOT is a real depreciation. If the RER is instead defined as the home price over the foreign price, RER = TOT.

(e) Sustainable energy and economic sustainability. Partly. Sustainable use of energy is necessary but not sufficient for economic sustainability. Energy is a vital input; shifting to renewables and efficiency decouples growth from emissions and reduces exposure to fossil-fuel import shocks. India's Perform, Achieve and Trade (PAT) scheme has raised industrial energy efficiency, and the 500 GW non-fossil capacity target for 2030 reflects this logic. But energy sustainability alone cannot guarantee economic sustainability. The Jevons paradox shows that efficiency gains can cut the cost of energy services and raise total consumption. A green transition also involves high capital costs, grid-balancing costs, stranded fossil assets and dependence on critical-mineral supply chains. Economic sustainability needs the preservation of wealth across natural, human, physical and fiscal capital, so fiscal solvency, human-capital formation and employment generation are also required.