ECON 25200 Lecture Notes - Lecture 9: Xm Satellite Radio, Transfer Payment, National Income And Product Accounts

Thank you for helping!

1. Which of the following suggest that real per capita GDP is not a perfect measure of economy well-being?
a. population varies acro​ss countries
b. GDP doesn't measure the value-added during home production
c. GDP doesn't take into account income distribution
d. GDP understimates the values of goods and services produced in the economy because of inflation
e. GDP inacurrately measures the values of goods and services produced by the government
2. Suppose that y(t) describes how a variable y varies over time. Then the growth rate of the variable from year t to year t+1 is (approximately) equal to ( select all correct answers)
a. y(t+1) - y(t)
b. y(t+1) / y(t)-1
c. ln(y(t+1) / y(t)-1)
d. ln(y(t+1) / ln(y(t))
3. suppose the economy exhibits three consecutive quarters of negative real per capita growth. Would the policymakers say that the economy is in recession?
a. yes
b. no
4. when do we say that the economy is in a recession (select all the correct answers)
a. when the economy in in distress
b. when GDP is below its trend
c. when real per capita GDP is below its trend
d. when the economy exhibits two consecutive quarters of negative real per capita GDP growth
e. when unemployment is unusually high.

4. Consider a farmer who can either plant or market/consume his crop. Whatever amount he plants becomes a crop twice the size the following year. For example, if he plants seed from 2 ears of corn, he gets 4 ears of corn at harvest. Assume he starts off with 50 bushels of corn.

a. If he decides every year to market/consume half his crop and plant the rest, what will his harvest be next year? What will his consumption be? How fast will his production and consumption grow over time?

b. If he decides every year to market/consume 2/5 of his crop and plant the rest, what will his harvest be next year? What will his consumption be? How fast will his production and consumption grow over time?

c. Compare the consumption of the farmer in each of the first five years under plans a. and b.

d. Why might the results of plan b. not be realistic?

5. Imagine the following goal of Lenin/Stalin at the beginning of the Soviet regime in Russia: to overtake (i.e. equal) and surpass the world’s industrialized economies in terms of GDP per capita. To achieve this goal, the main instrument of control is the fraction of national production that is devoted to building the nation’s productive capacity: new machines, factories, transportation equipment, and roads. That is, the main instrument to achieve this goal is what fraction of GDP to devote to investment. The rest of national production is used for consumption, i.e. to produce consumer items like clothing and food. The country begins with relatively little capital, being mostly rural and non-industrialized. Assume each of the following:  GDP per capita starts in USSR at $300/year.  The world’s industrialized economies start with GDP per capita of $5000/year.  Population growth rates are 2% everywhere in the world.  All capital depreciates at 8% per year.

a. At what average annual rate will income per capita in the USSR have to grow in order to overtake (i.e. to equal) the industrialized nations’ income per capita in exactly 30 years? Assume the industrialized nations’ income per capita is growing at 2% per year.

b. If the USSR sustains the growth rate of part a., how long after it has overtaken the industrialized nations’ GDP per capita will it take for it to attain double the industrialized nations’ GDP per capita? Again, assume the industrialized nations’ GDP per capita is growing at 2% per year. For parts c.-e., assume the basic growth framework of Harrod-Domar, and that 1 ruble’s worth of capital always produces 0.5 ruble’s worth of output (i.e. A=0.5). Also, assume inputs are used more efficiently in the industrialized countries, so that A=0.6 there.

c. What fraction of national output must the USSR devote to building new capital goods in order to attain the growth rate of part a.? What fraction would be left for consumer items? [Hint: another word for the fraction of output devoted to building new capital goods is the investment rate, i.e. the ratio It/Yt. And, remember that savings equals investment, so the investment rate equals the savings rate.]

d. At what rate are the industrialized countries saving if they are growing at 2% per year? e. What would you calculate the ratio of consumption per capita in the USSR to consumption per capita in the industrialized countries when the USSR overtakes the industrialized countries (i.e. when GDP per capita is equal)? Assume the savings rates of parts c. & d. What would the ratio be when the USSR reaches double the industrialized nations’ GDP per capita?

In recent years, the BRIC (Brazil, Russia, India and China) countries have received much attention due to their growing importance in the world economy. Now that you are equipped with knowledge about macroeconomic data, you can take a first-hand look at how quickly these countries have been growing, how much inflation they have, and how developed they are when compared to the USA.

The PPP conversion factor is the price in US dollars of a basket of goods (chosen by the World Bank) in the USA divided by the price in local currency of a comparable basket in that country.

For each of the BRIC countries and the US, over the period 2000-2013, answer the following:

1.What was the average annual inflation rate?

2.What was the average annual growth rate of population?

3.What was the average annual growth rate of real GDP?

4.What was the average annual growth rate of real GDP per capita?

5.For each of the BRIC countries, in the year 2013, how did real income per capita compare to that in the US? (To make this comparison, report real GDP per capita for each country as a percentage of the US.) Report two answers, one based on market exchange rates and one adjusted for differences in purchasing power.