Quiz #1 February 23, 2016

Transcription

1 Macroeconomics David Backus Quiz #1 February 23, 2016 You have precisely 75 minutes to complete this exam. Please write your name below and answer each question in the space provided. You may consult one page of notes and a calculator, but devices capable of wireless transmission are prohibited. I understand that the honor code applies: I will not lie, cheat, or steal to gain an academic advantage, or tolerate those who do. (Name and Signature) 1. National accounts. We ll use a fictitious economy to remind ourselves how national accounts work. The economy has the following people: Landowner. Who rents her farm (land, buildings, and equipment) for 50 and her cafe for 20. Farmer. Who produces food and sells it for 120: 100 to the cafe manager and 20 directly to consumers. He also buys a new harvesting machine for 10 from another country. Cafe manager. Who buys 100 worth of food and sells it (cooked) for 150. Cook. Who is paid 20 by the cafe manager. Use these numbers to construct national income and product accounts: (a) What is value added by each production unit? (10 points) (b) What is Gross Domestic Product? (10 points) (c) What is Gross Domestic Income? (10 points) (d) What does the expenditure identity look like here? (10 points) Solution: (a) The two production units are the farm and the cafe. Value-added is sales minus intermediate inputs everything but capital and labor. For the farm that s 120 (no inputs listed). For the cafe, that s = 50. (b) GDP is the sum of the answers in (a): = 170.

2 Quiz #1 2 GDP per worker (000s of 2005 USD) Figure 1. GDP Per Worker in and. (c) GDI is the same number from the perspective of income: value-added equals payments to capital and labor of some form that is, income. So the number is 170. (d) Gross Domestic Expenditure is the same number from the perspective of final sales, namely 170. Here we have 150 by the cafe and 20 by the farmer. All of this is consumption. The farmer s sales to the cafe are not final sales, they show up in the cafe s numbers. What about the investment of 10 (the farmer s new machine)? It shows up as 10 under investment and 10 under net exports (it s an import, which counts negatively). So the expenditure identity is Y = C + I + G + NX 170 = Prospects for. You have been asked to write a short report on the economic prospects for : Can we expect it to grow as has, or are there factors that you think will inhibit future economic performance? is a large country, with an ethnically and linguistically diverse population of 180 million and an equally diverse geography. Its level of development after independence in 1947 was comparable to s. The numbers in the Penn

3 Quiz #1 3 Year Y/L Y/L K/L Table 1. Aggregate data for and. The numbers are thousands of 2005 US dollars. Source: Penn World Table, Version 7.1. World Table show that GDP per worker in 1950 was 25% above s, with somewhat less difference in GDP per capita. Since 1990, however, has grown rapidly, while has not. See Figure 1 and Table 1. The country is now a democracy, but has alternated between democratic and military rule throughout its history. The Economist Intelligence Unit s Country Report states: s 1973 constitution established as a federal parliamentary democracy, but it has undergone major amendments to mould the political system to the wishes of successive political leaders.... The EIU now categorises as a hybrid regime and ranks it 112 (of 167) on its democracy index. The EIU concludes: Functioning of government remains compromised by the public s lack of confidence in the government s ability to address the many serious political and economic problems that faces; high levels of graft; and the pervasive influence of the army in government. Additional governance indicators from the World Bank are reported on Table 2. (a) Compute continuously-compounded annual growth rates of GDP per worker for and for the period Which is higher? (10 points) (b) Identify the sources of growth in over the same period. (This is an indication that you should do the usual growth accounting calculations.) Why has growth been so slow? (15 points) (c) Use the information provided to assess s prospects. How important do you think democracy and governance in general are to s economic performance? Do you see it growing like or more slowly? Why? (10 points) Solution:

4 Quiz #1 4 Voice and accountability Political stability Govt effectiveness Regulatory quality Rule of law Control of corruption Table 2. Governance indicators for and. The numbers are percentiles and range from 0 (worst) to 100 (best). Source: World Bank. Year Y/L Y/L K/L A Growth rate (%) (a) Complete table of calculations above. The annual growth rate of s GDP per worker is γ Y/L = [ln(6.681) ln(5.473)]/( ) = 0.997%. The others are computed the same way. We see growth rates of (roughly) 4.3% in and 1.0% in, which is a huge difference over 20 years. You can see the result in Figure 1. Grading: 5 points for each calculation done correctly. (b) Growth accounting involves this equation: With the numbers above, we have γ Y/L = (1/3)γ K/L + γ A = (1/3) We see that most of the growth has been due to productivity A, but the total is small. Evidently there s little productivity growth or capital formation in, with the result that there s little growth in output per worker. Grading: 3 points for noting the growth accounting equation, 3 for each of the numbers in it, 3 more for interpreting the results sensibly.

5 Quiz #1 5 (c) How does look to you? The political history and governance indicators all show that s institutions work less well than s. It s not hard to imagine that political instability, lawlessness, and corruption discourage investment and productivity improvements. Grading: 10 points for linking slow growth to the political history and governance indicators. 3. Short answers. (a) Real and nominal. Over the past year, real GDP in the US has gone up 2.1 percent and nominal GDP has gone up 3.1 percent. What do the two numbers mean? Why are they different? (10 points) (b) Production. Using only the production function, what is the impact of regulations that limit the entry of innovative new firms? (10 points) (c) Malthus. What happens in his model if births are greater than deaths? What is the impact on income per person? (10 points) (d) Solow. What happens in his model if investment is greater than depreciation? What is the impact on output? (10 points) Solution: (a) Real GDP is (roughly) an index of quantities produced valued at baseyear prices. Any change reflects changes in the quantities, since we are using the same prices at all dates. Nominal GDP is the current value of goods produced: the sum of quantities produced at current prices. Its growth thus reflects changes in both prices and quantities. The difference in their growth rates is (approximately) the growth rate of prices, which we call inflation. Grading: 8 points for defining the two concepts, 2 for noting that inflation is the difference. (b) If we reduce entry by innovative firms presumably productive ones we re likely to reduce overall productivity. Grading: 10 points for this answer. (c) If births are greater deaths, the population goes up. If the population goes up, income per person goes down (diminishing returns to labor in the production function). Grading: 5 points for each component.

6 Quiz #1 6 (d) If investment is greater than depreciation, the capital stock goes up. If the capital stock goes up, output goes up, too (the production function). Grading: 5 points for each component.

7 Quiz #1 7 c 2016 David Backus NYU Stern School of Business