Econ 302 First Midterm
Quality improvements as a source of well-being are ignored.
Professor Nordhaus' light example in the Economist article "The trouble with GDP" highlights a major shortcoming of GDP as a measure of welfare. Which of the answers below best captures the essence of his argument?
Consumption expenditures will increase by $12,000 - GDP measures the market value of final goods and services produced in an economy over a certain period. Thus, the value of a house built earlier does not get counted in this year's GDP. The only new production is the service by the real estate agent who got paid a commission for that service.
This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP? -Consumption expenditures will increase by $212,000 -Consumption expenditures will increase by $12,000 -Investment expenditures will increase by $212,000 -Investment expenditures will increase by $12,000
False - The trade balance is exports minus imports. The trade balance is negative when imports exceeds exports.
When the trade balance is negative, domestic producers are exporting more goods than are being imported. -True or False
Child mortality rates, and environmental degradation
Which of the following are NOT discussed in Jones and Klenow's alternative measure of economic welfare? (Note: there may be more than one correct answer. Select all that apply.) -Inequality -Leisure -Life Expectancy -Child mortality rates -consumption share of GDP -environmental degradation
You buy a house - Investment includes purchases of structures and equipment by businesses in addition to purchases of new homes. A computer for home counts as consumption.
Which of the following counts as investment? -You buy a stock - You buy a computer to use for fun at home -You buy a new house -All of these choices are correct
32 - Applying the Rule of 70 implies 70/3.5 = 20. Thus, income will double in 20 years. In a century, per capita income will double 5 times, which is 100/20. Thus, GDP per capital will increase by a factor of 25
With an average annual growth rate of 3.5 percent per year, per capita income will increase by what factor over a century? 16 32 64 128
2% - The growth rate formula for such a production function is g(Yt) = g(At) + (1/3)*g(Kt) + (2/3)*g(Lt). The first two terms cancel and we are left with (2/3)*(3).
If Y = AK1/3L2/3 and A grows at a rate of 1 percent per year, K grows at a rate of negative 3 percent per year and L grows at a rate of 3 percent per year, then the growth rate of Y is 0% 1% 2% 3%
False - Imagine an economy with a given rate of depreciation and investment. An economy with higher rates will have depreciation and investment curves that are both higher in the Solow diagram. Whether the steady state is higher or lower depends on the magnitudes of the parameters. Thus, we cannot determine the output definitively—it may be higher, lower, or the same.
If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output. True or False
1.4% - We can decompose the growth rate of per capita GDP into the growth rate of TFP, the growth rate of capital, and the growth rate of workers. Therefore, in this example the contribution of TFP is equal to 2.7%-1.1%-0.2%=1.4%
For the years 1995-2007, if output per person in the private sector grew 2.7 percent, the contribution of the capital-labor ratio was 1.1 percent, and the change in the labor composition accounted for 0.2 percent of that growth, what was the growth rate of total factor productivity? 3.6% 1.8% 4% 2.3%
The commenda contract enabled up-and-coming traders to acquire equity stakes in risky, but potentially lucrative commercial voyages without requiring them to supply capital in the same proportion as their profit share.
One example of an inclusive institution discussed by Acemoglu and Robinson in their book "Why Nations Fail" (and in a large number of other publications) is the so-called commenda contract in Mediaval Venice (and other parts of the Mediterranean). These contracts are discussed in some additional detail in the two references in the Canvas module covering chapter 4 of the textbook. Acemoglu and Robinson claim that this type of contract offered emerging traders a pathway to commercial success and wealth. What feature best captures the "inclusiveness" of this type of contract?
constant returns to scale
One of the key characteristics of the Cobb-Douglas production function is:
5% - Figure 6.2. Output per capita grows at a constant rate. Therefore, we can calculate the level of income per capita in any two periods and find the corresponding growth rate. For example, y1 = 100x(1 - 0.05)x(1 +0.05) = 99.8 and y2 = 100x(1 - 0.05)x(1 + 0.05)2 = 104.7. The growth rate of per capita output in period 2 is then (104.7-99.8)/99.8=5%.
A Romer economy starts off with an initial stock of ideas equal to 100. The growth rate of ideas is 5% and the share of the population engaged in research is 5%. What is the growth rate of output per capita? Round to the nearest decimal. 1% 2% 5% 10%
100(1 + 0.01x2)10 - Pages 148-149
A Romer economy starts off with an initial stock of ideas equal to 100. The total population in the economy is 60, two of the workers are employed in the research sector, and the productivity parameter of the research sector is equal to 0.01. The stock of ideas in period 10 is equal to:
False - GDP is the final goods and services produced in an economy. Here the good is produced in Germany and will increase German GDP.
A U.S. citizen works for a U.S. company in Germany. The income earned by the citizen increases U.S. GDP. True or False
150,000 - Value added is revenue generated by the producer minus the value of intermediate goods. The wood and steel are the intermediate goods.
A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is -200,000 -150,000 -100,000 -50,000
China - convergence is the process of a nation's economy catching up to another nation's economy.
A country that, since 1980, has shown convergence to the United States is Japan China South Africa Germany
Accounting Profit - Economic profit equals total revenue minus payments to all inputs. Accounting profit equals total revenue minus payments to inputs other than capital.
A firm uses capital and labor to produce a good. Which of the following is greatest? Accounting Profit Economic Profit It depends All are equal
1/4 - The fastest growing country during 1960-2014 was Botswana with an average annual growth rate of above 6%. Its level of per capita GDP is slightly above LaTeX: \tfrac{1}{4} 1 4 of the U.S. level.
According to figure 3.7, the fastest growing country during 1960-2014 had a level of per capita GDP approximately equal to _____of the U.S. level in 2014: 1/16 1/8 1/4 1/2
2.3 page 115, equation 5.12
According to the International Monetary Fund, income per capita in Bhutan in 2015 was Int$8,201 while income per capita in Chad in the same year was Int$1,214. If Bhutan's investment rate is 40% and Chad's investment rate is 10%, what is the productivity ratio ABhutan/AChad ? Round to the nearest tenth. Assume both countries are in their steady states. 4.0 3.4 2.3 1.5
both have different steady-state level of output and the same capital stock below the steady-state level - the country with the higher SS will grow faster
According to the Solow model two countries will grow at different rates if: both have the same steady-state level of output and the same capital stock below the steady-state level both have different steady-state level of output and the same capital stock below the steady-state level both have the same steady-state level of output and the same capital stock above the steady-state level they are both in their steady states
The same country 1 year after the natural disaster destroyed most of the capital stock - The principle of transition dynamics says that an economy that is farther below its steady state will grow faster. The destruction of the capital stock places the economy further below its steady state 1 year after the destruction took place.
According to the principle of transition dynamics, which economy will grow fastest? A poor country in a steady state A rich country in a steady state A country 10 years after a natural disaster destroyed most of the capital stock The same country 1 year after the natural disaster destroyed most of the capital stock
130,000 - Page 50. Apply formula 3.7 where y0 equals 40,000, the growth rate is .03, and t equals 40.
After graduating college, you start a job making $40,000. Your earnings grow at a constant growth rate of 3 percent per year. When you retire 40 years later, you are earning approximately: 41,000 70,000 100,000 130,000
the growth rate of output to rise initially as the economy begins to converge to the old steady state. - The diagram in Figure 5.1 indicates that if the capital stock is below the steady-state level of capital, the economy will proceed to the old steady-state level. Note that a shock to the level of capital will not shift any of the curves, and that the steady state remains unchanged in the long run. Because the economy is below steady state, growth is positive.
An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause the economy to converge to a new lower steady state. the growth rate of output to rise initially as the economy begins to converge to the old steady state. the growth rate of output to rise initially as the economy begins to converge to a new lower steady state. the economy to enter a period of negative growth.
Less than one
Consider Figure 4.1. The shape of this production function suggests that α in the production function LaTeX: Y=K^\alpha L^{1-\alpha} Y = K α L 1 − α is:
40 tons of cream cheese - Since the numéraire good is cream cheese, all prices are expressed in tons of cream cheese. Total payments to capital and labor (w*L + r*K) are also expressed in tons of cream cheese. In equilibrium the sum of payments to capital and labor is equal to total production.
Consider a perfectly competitive economy with a production function Y = AK^0.33L^0.66. There are 27 workers who produce cream cheese (a numéraire good) with 125 units of capital. If the productivity parameter is equal to 1 and the economy produces 40 tons of cream cheese in equilibrium, what is the sum of the total payments to capital and labor? Cannot be determined 152 tons of cream cheese 40 tons of cream cheese $40
-6.2% - Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000 Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000 Percentage change = (18,000-22,000)/22,000= -18% Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000 Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000 Percentage change = (17,000-20,000)/20,000= -15% Percentage change in real GDP in chained prices benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5% Nominal GDP 2014 = 2,000x6 + 10x1,000=22,000 Nominal GDP 2015 = 1,000x5 + 12x1,000=17,000 Percentage change in nominal GDP = (17,000-22,000)/22,000 = -22.7% Percentage change in price level (inflation) = -22.7%+16.5%=-6.2%
Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the inflation rate is approximately: 50% -28.3% -6.2% -2.7%
-16.5% - Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000 Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000 Percentage change = (18,000-22,000)/22,000= -18% Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000 Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000 Percentage change = (17,000-20,000)/20,000= -15% Percentage change in real GDP in chained prices benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5%
Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the percentage change in real GDP in chained prices benchmarked to 2015 is: 22% 16.5% -16.5% -22%
is positive because the economy is below its steady state. - Replace the given numbers in equation 5.7 and solve for the steady state level of capital: K* = 125. Therefore, Y* = 5 * 25 = 125. If the economy currently produces 100 units of output according to the Solow diagram it is below its steady state and the growth rate of the economy is positive.
Consider an economy described by the textbook Solow model with a production function. The economy is producing 100 units of output and the productivity parameter is equal to 1. If the depreciation rate is 6%, the investment rate is 6%, and there are 125 workers, the growth rate of the economy_____: is positive because the economy is below its steady state. is equal to zero because the economy is at its steady state. is negative because the economy is above its steady state. cannot be determined
total factor productivity; 0.37
Considering the data in Table 4.1, the explanation for the difference between the predicted and actual level of output is called ________. If you compare South Africa's observed and predicted output, this difference is equal to ________.
the growth rate of GDP - Rule of 70
How quickly GDP doubles will depend on: the initial value of GDP the growth rate of GDP the current value of GDP all of these
the economy is above its steady state and growth of output is negative - Negative net investment implies depreciation is greater than investment. Thus, the economy has a capital stock that is decreasing because it is above steady state.
If net investment is negative: the economy is above its steady state and growth of output is positive. the economy is above its steady state and growth of output is negative. the economy is below its steady state and growth of output is positive. the economy is below its steady state and growth of output is negative
1,050 - Nominal GDP = Real GDP x Price level. Applying the second property of growth rates: growth rate of nominal GDP = growth rate of real GDP + growth rate of the price level. Growth rate of real GDP = growth rate of nominal GDP - growth rate of the price level. Growth rate of real GDP = 7% - 2% = 5%. The growth rate is the percentage change from year 1 to year 2: 5% = (real GDP in year 2 - 1,000)/1,000. Real GDP in year 2 = $1,050.
If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2? Use the properties of growth rates in section 3.5 of the textbook to answer your question. 1,000 1,020 1,050 1,100
True - Growth rate formulas imply that the growth rate of per capita GDP is the growth rate of GDP minus the growth rate of population, which in this example is 0.
If population and GDP are growing at the same rates, then per capita GDP does not grow. True or False
2% - Rule of 70
If population doubles every 35 years, then the growth rate of population is 1% 2% 3% 4%
True - The percentage change in nominal GDP is approximately the inflation rate plus the percentage change in real GDP.
If real GDP increases by 2 percent and nominal GDP increases by 4 percent, then inflation is approximately 2 percent. -True or False
6
If the production function is given by Y = K^0.25L^0.75 K = 81 and L = 2.5, total output equals about:
the largest number when using the Paasche index -In a two-good economy, real GDP depends on which year is selected for the prices. The Paasche index uses most recent prices and will give the largest number for real GDP when there is inflation—even though the actual quantity amounts are unchanged.
Imagine a two-good economy where the quantity of the goods produced is unchanged over time, but where prices have increased. Then, in the most recent year, real GDP will be -the largest number when using the Fisher index -the largest number when using the Laspeyres index -the largest number when using the Paasche index -the same no matter the index used
The productivity parameter - Notice that the investment rate is raised to the power of .5, the labor force to the power of 1, and the productivity parameter to the power of 1.5. Thus, if the magnitudes of the increases are identical, the productivity parameter will have the largest impact on output in steady state.
Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output? The investment rate The productivity parameter The amount of labor They all will increase output by the same amount.
The fraction of researcher must be rising while their productivity is declining at the same time
In "The cost of innovation has risen, and productivity has suffered", the Economist magazine discusses research by Bloom, Jones, Van Reenen, and Webb. They find evidence that productivity growth has been fairly constant in recent decades while the number of researchers has risen very sharply. How can the Romer model reviewed in class be reconciled with this empirical evidence?
10% - The data above are plotted using a ratio scale. Since this is a straight line we can conclude that the growth rate is constant. We see that the investment doubles every 7 years (i.e. for 1994 - 2001 the investment grew from $4,000 to $8,000; or use formula 3.9 to verify). Therefore, we can estimate the growth rate using the rule of 70: 70/7 = 10%
In 1994 your parents made an investment of $4,000. By 2015 the investment grew to $32,000. Assuming a constant rate of growth, what was the average annual growth rate of this investment? 7% 10% 70% 100%
productivity, the depreciation rate, and the saving rate
In the Solow model, the steady-state level of output per worker is a function of:
70; 5; 14
In the year 2014, the five richest countries had a per capita GDP that was ________ times higher than the five poorest countries. Capital per worker varies by a factor of about ________ while total factor productivity is about ________ times higher in the top-5 compared to the bottom-5.
Consumption
Recently, the largest share of GDP is -consumption -government purchases -investment -net exports
True - Wages in poorer countries are usually lower than wages in rich countries. Thus, prices are lower in Uganda. This implies that adjusting by the ratio of U.S. to Ugandan prices will make Uganda's GDP appear larger than if using only an exchange rate adjustment.
Suppose we compare GDP per person in Uganda and the United States in two ways: first using the exchange rate method and second using the relative price-based conversion as well. Then, Uganda appears to be richer under the relative price-based conversion than with the exchange rate conversion. -True or False
but hold labor constant, output will increase, but at a decreasing rate
The law of diminishing marginal product to capital means that as we add additional units of capital: and labor, output will increase, but at a constant rate. and labor, output will increase, but at a decreasing rate. but hold labor constant, output will increase, but at an increasing rate but hold labor constant, output will increase, but at a constant rate but hold labor constant, output will increase, but at a decreasing rate
is largest when the economy is above its steady state. - Consumption is the difference between the amount produced and the amount invested. The amount invested depends on the investment rate and the production function, none of which depend on the depreciation rate. We can see from the figure that the difference between the output line and the investment line grows as capital increases.
The level of consumption:
profits are zero
The reason perfect competition cannot generate new ideas is that:
All of the above
Under national income accounting, GDP equals -the goods produced in the economy -the income earned in the economy -the total purchases in the economy -all of the above
Natural disasters lead to a rise in GDP since reconstruction efforts are included, but the destruction of infrastructure, property,... that triggers the recovery effort is not. GDP tends to understate the welfare costs of natural disasters.
What is the paradox that Diane Coyle (the author of "GDP: A Brief but Affectionate History") highlights in the NPR Planet Money podcast "Beyond GDP"?
sF(K,L) - dK = 0
What is the steady state equation?
Nomial/chain-weighted - Nominal variables are best for comparing shares of GDP because the nominal variables will add up, but chain-weighted real variables are best for measuring economic growth because it produces a more accurate portrayal of how real GDP changes over time.
When comparing shares of consumption in GDP it is best to use ( ___ ) variables. When comparing real rates of economic growth it is best to use ( ___ ) variables. -nominal/nominal -chain-weighted/chain-weighted -nominal/chain-weighted -chain-weighted/nominal
The U.S. government increases social security payments - Transfer payments do not increase GDP because nothing new is purchased. When the U.S. government purchases a tank from a U.S. company, this is a government purchase, which counts towards GDP. When the French government purchases a tank produced in America, this increases U.S. GDP as it is exported out of the country. Increasing funding for tax policy at a U.S. university is government-funded research, which also counts towards GDP.
Which of the following does NOT increase the U.S. GDP? -The U.S. government purchases a tank from a U.S. company -The U.S. government increases social security payments -The U.S. government increases funding for tax policy at a U.S. university. -The French government purchases a tank from a U.S.-based company.
Screws and bolts used for making cars at an automobile factory - Screws and bolts are an intermediate good. Inputs used in the production process are not capital.
Which of the following is NOT an example of capital? - Machines at an automobile factory -An automobile factory building -Screws and bolt used for making cars at an automobile factory -A plant manager's computer
1, 5, 25, 125, 625 - A ratio scale is one where the numbers exhibit a constant ratio. The ratio scale here has a constant ratio of 5.
Which of the following is an example of labels for equidistant tick marks on a ratio scale?