1. The Federal Reserve Bank of St. Louis maintains a database... The right series to download are:

Transcription

1 Economics 154a, Spring 2005 Intermediate Macroeconomics Problem Set 1: Answer Key 1. The Federal Reserve Bank of St. Louis maintains a database... The right series to download are: (a) GDP (Y): Real Gross domestic Product, Decimal 1 (b) Consumption (C): Real Private Consumption Expenditures-Q (c) Government expenditures (G): Real Gross Government Expenditures and & Gross Investment, 1 Decimal (d) Private Investment (I): Real Gross Private Domestic Investment (e) Net Exports (NX): Real Net Exports of Goods and Services, or since this series does not go all the way back to 1947, as the others do, you can construct it from Exports-Imports. To calculate national savings you use the following identity: S=I+CA. For I you use the series above, and for CA you can either take the Balance on Current Account or, since CA= NX+NFP and NFP are generally small, you can approximate it by using NX from above. Figure 1 shows the five components of GDP as fractions of the total. In the long run the main trend to be observed is the increase in the proportion of output that is privately consumed and the corresponding decrease in government expenditures. In the short run, or what economists call at business cycle frequencies you can see that movements in the I fraction of GDP run counter to those in C and G. Finally, regarding this millennium... you can see a decrease in the proportion of GDP that corresponds to investment during , that coincides with a small increase in the fraction consumed by the government and by a huge negative increase in the size of net exports. Finally, Investment can be larger than savings if the current account is negative, that is, if the US is receiving resources (foreign saving) from 1

2 1 0.8 Consumption Investment Net Exports Government National Savings 0.6 Fraction of GDP year Figure 1: GDP and Components + Saving abroad. A country that uses more resources than it produces must receive those extra resources from abroad. Notes: Look at the Bureau of Economic Analysis website: which has very well organized tables of GDP and its components and subcomponents. Also, to check your data and see if you ve chosen the right series, look at the tables in the book, is your GDP around trillion? Is consumption around 70% of the total? Do the subcomponents add up to the series you are using? 2. Do problem 4 on p. 58 in the textbook. You can find tables from the November 2003 issue of the Survey of Current Business on the course web site... This question asks you to look at the measurement of national savings and investment. The typical measurements take all government expenditures as consumption disregarding the fact that a large part of G is actually investment. Therefore you are asked to create a new uses of savings identity based on GCE and GI, the consumption and 2

3 Table 1: Uses of Savings Identities Symbol Name q2 S pvt Gross Private Saving I Gross Private Domestic Investment CA Net Foreign Investment GI Gross Government Investment Ŝ gov Gross Government Saving S gov Government Savings (traditional) E Error:Statistical discrepancy Identity1 S pvt = I S gov + CA Identity2 S pvt = I + GI Ŝgov + CA investment components of G. The traditional uses of savings identity is where S pvt = I + ( S gov ) + CA, S gov = T (G + T R + INT ) is the government saving. However, if part of G is investment rather that consumption, we can create a new savings measure: Ŝ gov = T (GCE + T R + INT ), so that Ŝ gov = S gov + GI. This leads us to a new uses of savings identity: S pvt = I + GI + ( S gov GI) + CA = I + GI + ( Ŝgov) + CA Table 1 presents the verification of these two identities for 2001, 2002, and 2003q2. 3. Consider a world economy with two countries, the U.S. and France. Both countries make wine and (empty) wine bottles... Table 2 shows the necessary calculations for this question. 3

4 To get GDP by way of income, you must sum up the income earned within the US, wages and profits, put back in depreciation if your profits were profits after depreciation, and then adjust for net factor payments, that is payments within the US that are not domestic, and payments in France that belong in the US. To get GDP by way of expenditures, you must sum up the final goods and services sold in the US. Note that French exports to the US are sold in the US. Then you must adjust for items sold in the US but not produced in the US and vice-versa: net exports. NOTE: The textbook, in the bottom of page 34, suggests that exports and imports represent spending on FINAL goods and services. There was also a question in class in this regard. In the table above we have also taken intermediate goods in the calculation of imports and exports. We believe this is the right way to proceed, as a country can only record that it sold its goods, not what happened to them abroad. For further reading, the IMF publishes a Balance of Payments Manual which describes in all detail the typical accounting standards: 4. This problems considers an individuals labor supply decision in a specific example. The individual lives... NOT DUE THIS WEEK, DO REVISED VERSION ON PS2 4

5 Table 2: US and France GDP calculations USWine USBottle FrenchWine FrenchBottle FrenchCask Wages 200 to Frenchman 50 to American 150 to Frenchman 200 to American400 to Frenchman 100 to Frenchman Inputs 200 from USBottle 400 from UsBottle 100 from FrenchBottle 300 from FrenchBottle Capital Purchases 500 from FrenchCask 1000 from FrenchCask Depreciation Production Sales 1200 to US 200 to US 1600 to France 300 to France 1000 to France 200 to France 400 to France 1200 to US 100 to US 500 to US Change in Inventory Profits US: Income Approach (How much income was earned in the US?) Total Wages Profits Depreciation NFP US GDP 1300 France: Income Approach (How much income was earned in France?) Wages Profits Depreciation NFP France GDP 4200 US Expenditure Approach (How much was spent in the US?) Consumption Investment Government Net Exports US GDP 1300 France Expenditure Approach (How much was spent in France?) Consumption Investment Government 0 Net Exports France GDP 4200 US Savings Identity France Savings Identity S (Y-C-G) S (Y-C-G) 2400 I (Fixed+Inventory) 100 I (Fixed+Inventory) 1200 CA (CA=NX+NFP) CA (CA=NX+NFP) 1200 I+CA I+CA