Macro exam, Macro HW questions, macro exam 2

The development of national income accounting

together with improvements made subsequently, stands as one of the fundamental contributions of economics during the twentieth century

GDP only includes goods and services that

transact in markets

Economists use the word "nominal" to refer to

a measure like GDP when prices and quantities have not been seperated out

Chain weighting produces

a more accurate portryal of how real GDP changes over time

intellectual property products

a new category of investment; includes R&D spending as well as expenditures on durable intangible goods like software, movies, books, and music

ratio scale

a plot where equally spaced tick marks on the vertical axis are labeled consecutively with numbers that exhibit a constant ratio

diminishing returns

a property of production and utility functions. In production, inputs are typically subject to diminishing returns. that is increasing a single input initially has a fairly large effect on output, but the effect diminishes as the quantity of the input grows

To some extent the trade deficit is caused by

a rise in consumption

costs of economic growth

environmental problems such as pollution, the depletion of natural resources, and global warming;

percentage change in nominal GDP

equals percentage change in price level + percentage change in real GDP

institutions

features of an economy that shape the allocation of resources, including property rights, the legal system, and the rules and regulations governing individual behavior

the standard replication argument

the justification for constant returns principle: if you double all the inputs of production you double the output

In Cobb-Douglas production functions generally

the marginal product of a factor is the product of the factor's exponent and the average amount that each unit of the factor produces

Gross domestic product

the market value of the final goods and services produced in an economy over a certain period; the key measure of the state of the economy

Paasche index

the method of computing the change in real GDP with the final price

Laspeyres index

the method of computing the change in real GDP with the initial prices

Marginal product of labor (MPL)

is the extra amount of output that is produced when one unit of labor is added, holding all the other inputs constant

A growth rate in some variable y

is the percentage change in that variable

human capital

is the stock of skills that individuals accumulate to make them more productive

macroeconomics

is the study of collections of people and firms and how their interactions through markets determine the overall economic activity in a country or region

general equilibrium

the situation in a market economy in which all markets clear at current prices and all interactions across markets are taken into account

value added

is computed by subtracting the value of intermediate products from the revenue generated by each producer

to calculate real GDP in each country

Use a common set of prices

GDP does not include

changes in environmental resources

It is only the purchases that directly involve new production that are properly recorded as GDP

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Macroeconomic approach it takes to studying questions:

1. Document the facts 2. Develop a model 3. Compare the predictions of the model with the original facts 4. Use the model to make other predictions that may eventually be tested

3 things that explain TFP differences

1. human capital 2. technology 3. institutions

output per person tends to be higher when

1. the productivity parameter is higher and 2. the amount of capital per person is higher

labor share is relatively constant over time at

2/3

output growth corresponds to a change in Y

3 ways that Y can change: 1. capital stock (K) changes 2. labor force (L) changes 3. ability to produce goods with given resources (K,L) changes

The growth rate of GDP

= growth rates of per capita GDP + growth rates of the population

Total GDP in an economy

= per capita GDP x the population

Nominal GDP

= price level x real GDP

Total production =

= total income = total spending

Economic profits

= total revenue - payments to all inputs are the above-normal returns associated with prices that exceed those that prevail under perfect competition

The health of a nation's people is

omitted from GDP

The Solow Growth Model

A model that is key to understanding the macroeconomy in the long run. The Solow model emphasizes the roles played by capital and labor in production.

so,

For every dollar of product sold there is a dollar of income earned

example of capital are

structures like a factory or office building and equipment like computers and machines

saving

The difference between income and consumption; the amount of disposable income not spent.

National income identity

Y= C + I + G + Nx

national income accounting explained

Y= GDP; C= consumption; I= investment; G= government purchases; NX= net exports (exports - imports)

constant returns to scale

a function exhibits it if doubling each input exactly doubles output - a very convenient assumption - consistent with "replication" argument - a firm can build an identical factory, have identical workers, and can exactly double production

resource constraint

a fundamental relationship in an economy that constrains how resources can be allocated

steady state

a situation in which all variables in a model are constant. In the Solow Model, the steady state is the long-run outcome of the model. if the economy starts away from the steady state, it gradually moves towards it

equilibrium

a situation in which the markets in a model clear; that is, supply equals demand

National income accounting provides

a systematic method for aggregating the production of cars, computers, health care, and music into a single measure of overall economic activity; it relates this measure of aggregate production to the total amount of income earned by every person in the economy and to all the spending that occurs

trade balance

another name for net exports; when the trade balance is negative, we say there is a trade deficit

inflation rate

another name for the percentage change in the price level

ideas

are instructions or recipes; include designs for making objects

Examples of an endogenous variable

are the level of the wage and the level of employment

indirect business taxes

are the smallest component of income and include sales and property taxes paid by the business sector

profit maximization

basic idea: - hire capital until the cost of last unit equals its benefit - hire labor until the cost of last worker equals its benefit

real GDP

can be computed by deflating the nominal GDP; that is by dividing by the price level

nominal GDP

can go up either because the price level has gone up or because real GDP has gone up

convergence

concept in the study of economic growth consisting of catch-up behavior

output per person

divide output by the number of workers - per capita= per person = per worker equals the productivity parameter times capital per person raised to the 1/3 power

The sum of real chain-weighted consumption, investment, government purchases, and net exports

does not generally equal real chain-weighted GDP

In general rich countries tend to have

higher price levels than poorer countries

idea diagram

ideas --> non rivalry --> increasing returns --> problems with pure competition

Rule of 70

if Yt grows at a rate of g percent per year, then the number of years it takes Yt to double is approximately 70/g

decreasing returns to scale

if the exponents summed to less than 1, doubling the inputs would less than double output

increasing returns to scale

if the exponents summed to more than 1, then doubling the inputs would more than double the amount of output produced

constant returns to scale

if we double the amount of input produced then we double the amount of output that is produced

objects

include most goods we are familiar with: land, cell phones, oil, jet planes, computers, pencils, and paper as well as capital and labor from the Solow Model

Economic growth benefits:

increases in life expectancy, reductions in infant mortality, higher incomes, an expansion in the range of goods and services available

model

is a mathematical representation of a hypothetical world that we use to study economic phenomena

a by-product of economic growth

is income equality

An implication of the Rule of 70

is that the time it takes for income to double depends only on the growth rate, not on the current level of income

real interest rate

is the amount a person can earn by saving one unit of output for a year, or equivalently the amount a person must pay to borrow one unit of output for a year

the marginal product of capital (MPK)

is the extra amount of output that is produced when one unit of capital is added, holding all the other inputs constant

investment

is the way a firm increases its stock of capital

net investment

it is investment minus depreciation

No double counting with GDP

it is only the final goods and services that are counted towards GDP

allocating resources

maximize profits - under perfect condition firm takes prices as given

potential output

measures the way per capita GDP would evolve if prices were completely flexible and resources were fully employed

Economists use the word "real" to refer

only to the actual quantity of goods and services

endogenous variable

outcome generated by the model operating on exogenous variables and parameters

Example of exogenous variable

population in the economy

GDP in an economy equals

production, expenditure, and income

government spending includes

purchases of good and services, but also "transfer" payments like Social Security and Medicare, and interest payments on any outstanding government debt

exogenous variable

refers to an input that is allowed to change over time, but in a way that is completely determined ahead of time by the model builder

parameter

refers to an input that is generally fixed over time, except when the model builder decides to experiment by changing it

capital

refers to the inputs into production other than labor that are not completely used up in the production process

trade deficits

result when one economy borrows from another

budget deficits

result when the government borrows money to finance its spending

as more labor is added, MPL falls

slope of the production function equals MPL

production function

tells us how much ice cream Y can be produced if L workers are combined with K machines

Comparisons of GDP based on exchange rates

tend to yield larger differences across countries than comparisons based on common prices

total factor productivity

the efficiency with which inputs are transformed into output

factor shares

the fractions of income paid to factors of production, such as 1/3 to capital and 2/3 to labor

returns to education

the increase in wages resulting from additional years. of education

development accounting

the practice of using an economic model to account for differences in per capita GDP across countries

GDP deflator

the price level that satisfies the formula for nominal GDP

The Great Divergence

the standards of living in countries and how they have diverged dramatically in the past three centuries

depreciation

the wear and tear; if we subtract out the depreciation from the GDP then we get the net domestic product

transition dynamics

this key property of the long-run model says that an economy that starts below its steady state (or its balanced growth path) will grow rapidly until it reaches its steady state. Growth slows down as the gap between the economy's position and the steady state shrinks

Chain weighting/Fisher index

to compute the chain weighted index of real GDP, first compute the Laspeyres and the Paasche indexes then calculate the average of the two growth rates

economic profits are zero

unless there is some market power by which firms charge prices above marginal cost

determining the rental rate

we have just seen that MPL=w - the same logic shows that MPK=r - diminishing returns to capital: MPK falls as K rises - the MPK curve is the firm's demand curve for renting capital - firms maximize profits by choosing K such that MPK=r