: Instructor Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
Assignment I
1. (15 points) The questions below require you to obtain actual macroeconomic data. All of the data are available at Bureau of Economic Analysis, survey authority of Department of Commerce (www.bea.gov). You can find it historical data of (nominal/real) gross domestic product on its website (http://bea.gov/national/nipaweb/SelectTable.asp?Popular=Y). As we learn, it is divided intro four categories; consumption, investment, government expenditure and net exports. Using any spreadsheet program (e.x. MS Excel) or any program that you are familiar at, make the table for GDP of recent 20 year (1989~2009), GDP growth rates, its four components and its percent of GDP like the following example table. (That is, you need to replicate the following table for 1989~2009) and plot the growth rate of GDP like the following plot. (Don't copy the graph from other sources. Please make your own.) Answers)
Year GDP 2005 Dollar 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 7885.9 8033.9 8015.1 8287.1 8523.4 8870.7 9093.7 9433.9 9854.3 10283.5 10779.8 11226 11347.2 11553 11840.7 12263.8 12638.4 12976.2 13228.9 13228.8 12880.6 Growth Rates Growth Rates 3.57% 1.88% -0.23% 3.39% 2.85% 4.07% 2.51% 3.74% 4.46% 4.36% 4.83% 4.14% 1.08% 1.81% 2.49% 3.57% 3.05% 2.67% 1.95% 0.00% -2.63% Consumption 2005 Dollar 5209.9 5316.2 5324.2 5505.7 5701.2 5918.9 6079 6291.2 6523.4 6865.5 7240.9 7608.1 7813.9 8021.9 8247.6 8532.7 8819 9073.5 9289.5 9265 9153.9 % of GDP 66.07% 66.17% 66.43% 66.44% 66.89% 66.72% 66.85% 66.69% 66.20% 66.76% 67.17% 67.77% 68.86% 69.44% 69.65% 69.58% 69.78% 69.92% 70.22% 70.04% 71.07% Investment 2005 Dollar 1028.1 993.5 912.7 986.7 1074.8 1220.9 1258.9 1370.3 1540.8 1695.1 1844.3 1970.3 1831.9 1807 1871.6 2058.2 2172.2 2230.4 2161.6 1957.3 1515.7 % of GDP 13.04% 12.37% 11.39% 11.91% 12.61% 13.76% 13.84% 14.53% 15.64% 16.48% 17.11% 17.55% 16.14% 15.64% 15.81% 16.78% 17.19% 17.19% 16.34% 14.80% 11.77% Government Expenditure 2005 Dollar 1806.8 1864 1884.4 1893.2 1878.2 1878 1888.9 1907.9 1943.8 1985 2056.1 2097.8 2178.3 2279.6 2330.5 2362 2369.9 2402.1 2434.2 2502.7 2542.6 % of GDP 22.91% 23.20% 23.51% 22.85% 22.04% 21.17% 20.77% 20.22% 19.73% 19.30% 19.07% 18.69% 19.20% 19.73% 19.68% 19.26% 18.75% 18.51% 18.40% 18.92% 19.74% New Exports 2005 Dollar -99.2 -72.8 -32 -35.2 -75 -106.6 -98.8 -110.7 -139.8 -252.6 -356.6 -451.6 -472.1 -548.8 -603.9 -688 -722.7 -729.2 -654.9 -504.1 -363 % of GDP -1.26% -0.91% -0.40% -0.42% -0.88% -1.20% -1.09% -1.17% -1.42% -2.46% -3.31% -4.02% -4.16% -4.75% -5.10% -5.61% -5.72% -5.62% -4.95% -3.81% -2.82%
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uctor : Kim H.H. m, Instru Sprin 2011 ng
Interme ediate Ma acro Analy ysis Economic 01:220:3 cs 321
The G Growth Rate of GDP
6.00 0% 5.00 0% 4.00 0% 3.00 0% 2.00 0% 1.00 0% 0.00 0% -1.00 0% -2.00 0% -3.00 0% -4.00 0% 1989 1991 1 1993 1995 1997 1999 9 2001 2003 2005 2007 2009
2. (10 Locate th necessary economic d 0pt) he y data and appl them to an ly nswer the following data quest tions. All of th relevant data may be f he found in the E Economic Re eport of the Presid dent (http://w www.gpoacce ess.gov/eop/) ). a. Complete th following t he table with dat about the various cons ta sumer price in ndices (CPI). Yea ar 197 79 198 89 199 99 200 09 C All CPI It tems 72.6 7 124 1 166.6 2 214.5 % chan nge 71% 34% 29% CPI Medica al Care 67.5 149.3 3 250.6 6 375.6 6 % change 121% 68% 50% CPI Energy 65.7 94.3 106.6 193.1 % change
44% 13% 81%
b. If a unit of m medical care (for example a visit to the physician) cost $50 in 2 e, 2009, how m much did it c cost in 1979? ? c. During whic of the three intervals in the table (19 ch e n 9791989, 19891999, 19992009) w the was ate n s ? ra of inflation for all items the highest? d. During whic of the three intervals in the above ta ch n able was the rate of inflat e tion for all items the west? low e. Which events might acco ount for the u unusual beha avior of the e energy CPI in ndex relative to the ov verall index?
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Instructor : Kim, H.H. Spring 2011
Answer)
Intermediate Macro Analysis Economics 01:220:321
b. $50 in 2009 and CPI in 2009 is 375.6 and we know CPI in 1979 as 67.5 $50 medicare cost in 1978 = $50 c. 1979~1989 d. 1999~2009 e. Though in period 1989~1999, energy price didn't increase much, in next period, it jumped up by huge percentage. In this period US economy enjoyed quite long economic prosperity except short recession in 2001 and as Chinese economy rises, its consumption for energy also exploded so that global energy price went up and speculation demand for energy, especially in recent years, also increases
67.5 = $8.9856 375.6
3. (Ch.3. Q3) (10pt) Suppose that an economy's production function is Cobb-Douglas with parameter
= 0.3.
a. What fractions of income do capital and labor receive? b. Suppose that immigration increases the labor force by 10 percent. What happens to total output (in percent)? / The rental price of capital? / The real wage? c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent. What happens to total output (in percent)? / The rental price of capital? / The real wage? d. Suppose that a technological advance raises the value of parameter A by 10 percent. What happens to total output (in percent)? / The rental price of capital? / The real wage? Answer) a. A CobbDouglas production function has the form Y AK L MPL = (1 )Y/L. MPK = Y/K. Competitive profit-maximizing firms hire labor until its marginal product equals the real wage, and hire capital until its marginal product equals the real rental rate. Using these facts and the above marginal products for the CobbDouglas production function, we find: W/P = MPL = (1 )Y/L. R/P = MPK = Y/K. Rewriting this:
1
. The text showed
that the marginal products for the CobbDouglas production function are:
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Instructor : Kim, H.H. Spring 2011
(W/P)L = MPL L = (1 )Y. (R/P)K = MPK K = Y.
Intermediate Macro Analysis Economics 01:220:321
Note that the terms (W/P)L and (R/P)K are the wage bill and total return to capital, respectively. Given that the value of = 0.3, then the above formulas indicate that labor receives 70 percent of total output (or income), which is (1 0.3), and capital receives 30 percent of total output (or income). b. To determine what happens to total output when the labor force increases by 10 percent, consider the formula for the CobbDouglas production function:
Y AK L1
Let Y1 equal the initial value of output and Y2 equal final output. We know that = 0.3. We also know that labor L increases by 10 percent: Y1 = AK0.3L0.7. Y2= AK0.3(1.1L)0.7. Note that we multiplied L by 1.1 to reflect the 10-percent increase in the labor To force. calculate the percentage change in output, divide Y2 by Y1:
0.3 Y2 AK 1.1L Y1 AK 0.3 L0.7 0.7
1.1
0.7
1.069
That is, output increases by 6.9 percent. To determine how the increase in the labor force affects the rental price of capital, consider the formula for the real rental price of capital R/P: R/P = MPK = AK 1L1 . We know that = 0.3. We also know that labor (L) increases by 10 percent. Let (R/P)1 equal the initial value of the rental price of capital, and (R/P)2 equal the final rental price of capital after the labor force increases by 10 percent. To find (R/P)2, multiply L by 1.1 to reflect the 10-percent increase in the labor force: (R/P)1 = 0.3AK 0.7L0.7. (R/P)2 = 0.3AK 0.7(1.1L)0.7. The rental price increases by the ratio
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Instructor : Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
0.7
R / P 2 R / P 1
0.3 AK 0.7 1.1L 0.3 AK 0.7 L0.7 1.1
0.7
1.069
So the rental price increases by 6.9 percent. To determine how the increase in the labor force affects the real wage, consider the formula for the real wage W/P: W/P = MPL = (1 )AKL . We know that = 0.3. We also know that labor (L) increases by 10 percent. Let (W/P)1 equal the initial value of the real wage and (W/P)1 equal the final value of the real wage. To find (W/P)2, multiply L by 1.1 to reflect the 10-percent increase in the labor force: (W/P)1= (1 0.3)AK0.3L 0.3. (W/P)2 = (1 0.3)AK0.3(1.1L) 0.3. To calculate the percentage change in the real wage, divide (W/P)2 by (W/P)1
W / P 2 1 0.3 AK 0.3 1.1L 0.3 1 0.3 AK 0.3 L0.3 W / P 1 0.3 1.1
0.972
That is, the real wage falls by 2.8 percent. c. We can use the same logic as in part (b) to set Y1 = AK0.3L0.7. Y2 = A(1.1K)0.3L0.7. Therefore, we have:
0.7 Y2 A 1.1K L Y1 AK 0.3 L0.7 0.3
1.1
0.3
1.029
This equation shows that output increases by about 3 percent. Notice that < 0.5 means that proportional increases to capital will increase output by less than the same proportional increase to labor.
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Instructor : Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
Again using the same logic as in part (b) for the change in the real rental price of capital:
R / P 2 R / P 1
0.3 A 1.1K L0.7 0.3 AK 0.7 L0.7
0.7
1.1
0.7
0.935
The real rental price of capital falls by 6.5 percent because there are diminishing returns to capital; that is, when capital increases, its marginal product falls. Finally, the change in the real wage is:
W / P 2 W / P 1
0.7 A 1.1K L0.3 0.7 AK 0.3 L0.3
0.3
1.1
0.3
1.029
Hence, real wages increase by 2.9 percent because the added capital increases the marginal productivity of the existing workers. (Notice that the wage and output have both increased by the same amount, leaving the labor share unchanged--a feature of Cobb Douglas technologies.) d. Using the same formula, we find that the change in output is:
Y2 1.1AK 0.3 L0.7 Y1 AK 0.3 L0.7 1.1
This equation shows that output increases by 10 percent. Similarly, the rental price of capital and the real wage also increase by 10 percent:
R / P 2 R / P 1 W / P 2 W / P 1
0.3 1.1A K 0.7 L0.7 0.3 AK 0.7 L0.7 1.1 0.7 1.1A K 0.3 L0.3 0.7 AK 0.3 L0.3
1.1
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Instructor : Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
4. (15pt) During his first term, President Obama increased government spending and cut taxes. Given these developments, a. What happened to the government budget surplus/deficit ? / Does it increase or decrease by President's policy? b. State and explain what the exact long-run effects were on private saving, public saving, and national saving. c. Use the Investment-Saving diagram to state and illustrate the long-run impacts on national saving, investment, and the real interest rate. d. In part b, you can get prediction for budget surplus/deficit and federal government debt up to 2015. According to this estimate, what fiscal policy do you expect? Explain your answer. Answer) a. The government surplus fell by the increase in government spending plus the reduction in taxes. According to the White House prediction, the government will achieve budget surplus by 2015. (See the following graph which shows the budget surplus/deficit. Blue line is a realized value and red one is an expectation. And the other is the corresponding graph for government debt.)
Budget Surplus/Deficit
300,000
200,000
100,000
0 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-100,000
-200,000
-300,000
-400,000
-500,000
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Instructor : Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
Federal Debt (As a percentage of GDP)
140
120
100
80
60
40
20
0 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
b. Disposable income rose by the full amount of the tax reduction. Consumption rose by MPC times the reduction in taxes, and private saving rose by (1-MPC) times the reduction in taxes. Public saving fell by the increase in government spending plus the reduction in taxes. Consequently, national saving fell by the increase in government spending plus MPC times the reduction in taxes. c. S shifts left to S2. I does not shift. Consequently, the real interest rate rises and investment falls.
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Instructor : Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
r
S
2
S1
r2
r1
I (r )
I2
I1
S, I
d. (since I took out one question from the original version, this question is missing some information, the budget plan up to 2015. However, you can easily find out the budget plan through the internet. Therefore, I will give an extra credit, if you state correctly.) In the estimates, balance of budget become surplus as time goes by so that we can expect Obama administration' policy to balance the budget. This also tells the government will decrease government spending or raising tax in near future even though the government spends much of money or cuts taxes to stimulate economy and get out of current recession. Federal debts do not seem to be reduced in near future because the government intends to reduce budget deficit, not to achieve budget surplus according to their estimate. Therefore, federal debt will keep almost
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Instructor : Kim, H.H. Spring 2011
Intermediate Macro Analysis Economics 01:220:321
constant level. Additionally, this administration spends much of money and increase money supply so that real money balances are quite large in the economy. Meanwhile, policymaker also expect current recession will be over soon and once they confirm the end, it is necessary to call back in excessive money supply in the economy to prevent inflation. This action is achieved by decreasing government spending and raising taxes so that government budget will get to a balance level.
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