Midterm 1. The market value of all final goods and services produced in a country in a particular time period (usually a quarter or a year).

Transcription

1 CODE OF HONOR PLEDGE: Midterm 1 Principles of Macro Prof. Wyatt Brooks Fall 2012 I will not give or receive aid on this examination. I understand that if I am aware of cheating on this exam, I have an obligation to inform Professor Brooks. I also understand that Professor Brooks will follow the University of Notre Dame Academic Code of Honor if he detects acts of academic dishonesty. Signature: Printed Name: Date: Part I: Definitions and Abbreviations (10 of 105 points) a) What do the following abbreviations stand for? You do not need to define them. a. GDP Gross Domestic Product b. CPI Consumer Price Index c. IMF International Monetary Fund d. GNP Gross National Product e. PPI Producer Price Index b) What is the definition of GDP? The market value of all final goods and services produced in a country in a particular time period (usually a quarter or a year). c) What is the difference between GDP and GNP? GDP is based on geography (all production in a particular geographical location), while GNP is based on population (all production by a country s permanent residents or their businesses anywhere in the world).

2 Part II: Components of GDP (20 of 105 points) Suppose these were all the economic activities in a small country last year. a) For each, indicate the dollar value that each contributes to each component of GDP. If an item does not contribute to GDP, write none : C I G NX 1. Households buy $400 worth of apples Businesses buy $200 worth of machines to sort apples, and spend $75 on fertilizer 200 to aid in the growing of apples. 3. The government collects $200 in taxes. Of this, $50 is used to pay the tax collector and $150 is 50 given in cash to the poor. 4. Businesses sell $50 of plums to foreigners Households live in 100 identical houses. Of these, 25 houses are rented for $3 each and are lived in by their owners. 6. Households produce $100 worth of oranges. The oranges are not sold, but eaten by the none households where the oranges are grown. 7. Businesses buy $100 of pears from another country. Of this, $50 is bought by households and $50 is stored for next year. 8. A factory learns how to make less smoke each year. The resulting cleaner air is valued at none $100 by the population. Notes: 2) Fertilizer is an intermediate good (not counted) 3) The $150 is a transfer payment (not counted) 4) The rent that people pay is counted in consumption, plus the imputed rent that a home owner pays themselves from living in their house. Usually this has to be estimated, but since all these houses are identical, we know the rental value of all the houses. b) What was total GDP in the country last year? 1000

3 Part III: Measures of GDP and Price Levels (30 of 105 points) The following table summarizes the amount of goods sold and the prices of goods in 2010 and 2011: Prices Quantities Prices Quantities US Corn US Rice a. What is nominal GDP in the US in 2010? 200 In 2011? 500 b. Suppose 2010 is the base year. What is US real GDP in 2010? 200 In 2011? 250 c. What is the US GDP Deflator in 2010? 100 In 2011? 200 d. Suppose the basket of goods used to measure CPI is 4 units of rice and 2 unit of corn. What is the US CPI in 2010? 100 In 2011? 100 What is the CPI inflation rate in 2011? 0% e. In 2010, suppose Indian rice costs 100 rupees and the nominal exchange rate is 5 rupees per US dollar. What is the real exchange rate (in Indian rice per US rice) in 2010? 1 f. In 2011, suppose Indian rice costs 80 rupees and the nominal exchange rate is 4 rupees per US dollar. What is the real exchange rate (in Indian rice per US rice) in 2011? 1/2 g. Does the Law of One Price hold for rice in 2010? yes In 2011? no

4 Part IV: Simplified Solow Growth Model (25 of 105 points) Consider the simple version of the Solow Growth Model discussed in class summarized by these four equations: Consumers save a fraction s of output: I = s Y Capital grows as follows: K = I + (1-δ)K Firms use capital to make output: Y = A K 0.3 There is no government or trade: Y = C + I where Y is GDP, I is investment, C is consumption, s is the savings rate, K is the capital stock this year, K is the capital stock next year, A is productivity and δ is the rate of depreciation. a. Use these four equations to give an equation for K that only depends on K, A, s and δ. K = s A K (1- δ)k b. In the following space, draw a graph that illustrates the relationship between K, the capital stock this year, and K, the capital stock next year: see problem set 2 45 degree line c. Suppose the economy starts with a low level of capital K0. Label this on the graph, and show how to find the following period s capital stock K1. d. Label the steady state level of capital K*. e. Suppose the depreciation rate δ goes down. Label the new steady state level of capital K NEW. Same as an increase in the savings rate

5 Part V. Lessons from Growth Experiences (20 of 105 points) 1) In class, we discussed the growth experiences of South Korea and Argentina over the past 100 years. What was one key difference in international trade policies pursued in these two countries? (keep your answer to one or two sentences) South Korea pursued export promotion (low cost loans to exporters, favorable trade policies), while Argentina pursued import substitution (heavy tariffs, subsidization of industries to reduce the need for imports) 2) Looking at many examples from history, we see that China s pattern of fast growth is not unique. Give one reason why China s growth is unusually important. Because of China s huge population, high growth rates have a big effect on the world economy. China is now the second largest economy in the world. China s growth has led to a big reduction in world poverty. China is a big presence in several markets. 3) Name one factor that kept India from growing for most of its post-independence history, and what happened in 1991 that promoted its growth in the following 20 years? Protectionist trade policies, government subsidization of failing industries, labor market restrictions, the license raj, etc. In 1991, India reversed many of these policies when it had a structural adjustment program when it received an IMF loan. 4) What is the laissez faire approach to economic policy? Laissez faire is an approach to economic policy that calls for very little government intervention in the operation of the market. 5) What does market failure mean? What is an example of a market failure? Market failures are when unregulated markets lead to inefficient outcomes. Examples include public goods, externalities, information asymmetries, etc. 6) State one of the criticisms of the structural adjustment programs used by the World Bank and IMF. Some major criticisms are that SAPs are typically not specifically tailored, there is little evidence that they work, they leave countries with large levels of debt, there is no recourse if there is wrongdoing on the part of the World Bank, etc. Predictions for the final score of this weekend s football game (optional): Notre Dame 13 Michigan 6

6 EXTRA PAGE Use this area to do any work that won t fit in other parts. If you want to receive partial credit, clearly label which parts correspond to which questions, and note it on the original question. Extra graphs for Part IV. Use these if you make a mistake on the graph on page 4. If so, write see next page on page 4, and indicate which graph is your intended answer.