ISL244E MacroeconomicsProblem Session-2

byResearch Assistant Serkan Değirmenci (Ph.D. Candidate)

D202/20-22.02.2012

# Today #• B (2009), Macroeconomics:

- Chapter 2: A Tour of the Book (Pages: 41-61)Dig Deeper (DD): 7 (Page: 59) • GNH (2009), Macroeconomics in Context:

- Chapter 5: Macro. Measurement: The Current Approach (Pages: 95-124)

Exercises (E): 3-4-6-10 (Page: 121-122)- Chapter 6: Macro. Measurement: Environmental and Social Dimension (Pages: 125-148)

Exercises (E): 6-7-10 (Page: 147-148)

Chapter 2: DD-7 (Page: 59)• Measured and true GDP

Suppose that instead of cooking dinner for an hour, you decide to work an extra hour, earning an additional $12. You then purchase some (takeout) Chinese food, which costs you $10.a. By how much does measured GDP increase?b. Do you think the increase in measured GDP accurately reflects the effect on output of your decision to work? Explain.

• ANSWER: (Textbook: p. 42-48) a. Measured GDP increases by $10+$12=$22. (Strictly, this involves mixing the final goods and income approaches to GDP. Assume here that the $12 per hour of work creates a final good worth $12.) b. No. The true value of your decision to work should be less than $22. If you choose to work, the economy produces the value of your work plus a takeout meal. If you choose not to work, presumably the economy produces a home-cooked meal. The extra output arising from your choice to work is the value of your work plus any difference in value between takeout and home-cooked meals. In fact, however, the value of home-cooked meals is not counted in GDP. (Of course, there are other details. For example, the value of groceries used to produce home-cooked meals would be counted in GDP. Putting such details aside, however, the basic point is clear.)

Chapter 5: E-3 (Page: 121)• In which line (or lines) of Table 5.4 (the income approach) would the value of

each of the following be counted? If it is part of “net income flows from the rest of the world” explain whether it reflects domestic (or foreign) production, and whether it reflects domestic (or foreign) income. “Not counted in any category” is also an option.a. wages paid by your local supermarket to its employeesb. profits received by a U.S. electronics firm from its factory in Mexicoc. business spending to replace worn-out equipmentd. wages paid by a U.S. electronics firm to the employees of its factory in Mexicoe. profits received by a Japanese automaker from its factory in the United States

• ANSWER: (Textbook: p. 107)a. national income, b. net income payments from the rest of the world, this is foreign production but domestic income c. depreciation d. not counted in any category (note that it reflects both foreign production and foreign income, so it is counted in neither GDP nor NI) e. net income payments from the rest of the world (negatively)—it is domestic production but foreign income

Chapter 5: E-3 (Page: 121)

Chapter 5: E-4 (Page: 121)• In which line (or lines) of Table 5.3 (the spending approach) would the value of

each of the following be counted? “Not counted in any category” is also an option.a. a new refrigerator bought by a familyb. a book newly produced in Indiana and bought by a store in Mexicoc. new computers, manufactured in Asia, bought by a U.S. accounting companyd. meals produced and served in Virginia to military personnele. new computers, produced in the U.S., bought by a U.S. computer retail chain and not yet sold by the end of the yearf. a 3-year old couch bought by a used furniture store in Arizonag. cleaning services bought by a nonprofit hospital in New Yorkh. the services of volunteers in an environmental action campaign

• ANSWER: (Textbook: p. 105) a. durable goods. b. exports c. fixed investment (added) and imports (subtracted) d. national defense e. change in private inventories f. not counted in any category (not “newly produced”) g. services h. not counted in any category (since unpaid)

Chapter 5: E-4 (Page: 121)

Chapter 5: E-6 (Page: 122)*• Suppose an extremely simple economy produces only two goods,

pillows and rugs. In the first year, 50 pillows are produced, and sold at $5 each; 11 rugs are produced, and sold at $50 each. In the second year, 56 pillows are produced, and sold for $5 each; 12 rugs are produced, and sold at $60 each.a. What is nominal GDP in each of the two years?b. What is the growth rate of nominal GDP?c. What is real GDP in each year, expressed in terms of constant Year 1 dollars?d. What is the growth rate of real GDP (in constant Year 1 dollars)?

• ANSWER: (Textbook: p. 108-109-110-111) a. Year 1: $800. Year 2: $1000. b. 25%. c. Year 1: $800. Year 2: $880. d. 10%. (See spreadsheet table next page)

Chapter 5: E-6 (Page: 122)*

Chapter 5: E-10 (Page: 122) – Self Study• Go to the Turkish Statistical Institute Web site

(www.turkstat.gov.tr). What are the latest figures for real GDP, current dollar GDP, and the growth rate of GDP? What time period do these represent? In what sort of dollars is real GDP expressed?

• ANSWER:www.turkstat.gov.tr → National Accounts

Chapter 6: E-6 (Page: 147)• Describe in a short paragraph why measures of output do not

always measure well-being. Include some specific examples beyond those given in the text.

• ANSWER: (Textbook: p. 140-141) Some products reduce well-being, tobacco being a specific additional example. Some outputs reflect defensive expenditures. Increased buying of sump pumps to counteract flooding would be an additional example. Measures of output do not account for the loss of leisure. Standard measures of output do not count education or community building activities as investments; time spent in these activities are seen as time not spent on “productive” activities. Some methods of production reduce well-being. Measures of output alone do not reflect the distribution of incomes. Students may think of more examples, as well as more entire categories.

Chapter 6: E-7 (Page: 147)• In calculation of the Genuine Progress Indicator,

a. Which factors are subtracted off, compared to Personal Consumption Expenditures, because they represent bad things?b. Which factors are not included in GPI, even though they are included in GDP, because they are defensive expenditures or because of differences in accounting methods?

• ANSWER: (Textbook: p. 141-142-143) a. Bad things subtracted from Personal Consumption Expenditures in the GPI: social costs such as the cost of crime and environmental costs include carbon dioxide emissions damage. Adjustments for income inequality and net foreign borrowing also reduce the GPI. b. Defensive expenditures: all government spending except for services of highways and streets, are not included. Differences in accounting methods: (business) investment, consumer durables.

Chapter 6: E-7 (Page: 147)

Chapter 6: E-10 (Page: 148) – Self Study• The UNDP’s Human Development Index, as well as a variety of

other indicators of well-being, is published in its Human Development Report, which is available through its Web site (www.undp.org). Consult this report, and choose a country that is not included in Table 6.3. Write a paragraph describing this country’s performance on the HDI, as well as on four or five other indicators reported in the tables (such as inequality, HIV rates, or undernourishment).

• ANSWER: (www.undp.org)For example, in the 2007/2008 Human Development Report (online at http://hdr.undp.org/en/reports/global/hdr2007-2008/chapters/), in the tables for “Human Development Indicators” (at http://hdr.undp.org/en/media/hdr_20072008_en_indicator_tables.pdf), Table 1 contains information on the HDI displayed as, for example:

Chapter 6: E-10 (Page: 148) – Self Study

Other tables look at such factors as infant mortality and access to safe water. The notation “MDG” refers to the Millennium Development Goals (see Chapter 15 of this textbook.) Students should be encouraged to look at the footnotes—and, if necessary, the text of the Report—to understand what these figures represent.

Turkey (2010) (Country profile of human development indicators)

Health:Life expectancy at birth (year): 72.2

Education:Mean years of schooling (of adults) (years): 6.5

Income:GDP Per Capita (2008 PPP US$):13,359

HDI Rank: 83

to be continued…