exam_1 - QUESTIONS FOR MID-TERM EXAM draft AP8701_Oct 2013 T.Roe 1 Theory the Heckscher-Ohlin(H-O)model This question asks you to describe specify solve

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Unformatted text preview: QUESTIONS FOR MID-TERM EXAM draft AP8701_Oct. 2013 T.Roe 1 Theory: the Heckscher-Ohlin (H-O)model This question asks you to describe, specify, solve and interpret the H_O model, given as a point of departure, the following neoclassical production functions at the …rm level y1 = f 1 (`1 ; k1 ) y2 = f 2 (`2 ; k2 ) where `j ; kj are stocks of labor and capital. The household level the utility function is u (q1 ; q2 ) were qj , are in units of yj and households own the country’s entire stock of labor L and capital K: Proceed as follows: 1. Describe/state the economic environment of the modeled economy 2. Derive/state the household and the …rm’s optimization problem 3. Characterize equilibrium 4. Derive, in symbolic form, the reduced form equations for the model’s key variables fw; r; Y1 ; Y2 g : and then, state their "properties." 5. Consider the following economy 1 Activities Ag Ind./Serv Commodities Ag Resources Ind./Serv Labor Capital Gov. Plus HouseholdsAccumulationTrade Sum Check Morocco 16395 Prod. Act Ag 53146.24 Prod. Act In&Sr 3399 19794 41442 Comm. Ag Comm. In&Sr Labor Capital 8550 7845 43677 Gov+Households 29264 11704 Accumulation Trade Sum = WDI GDP Share: Labor Capital 11704 35127 21418 16395 0.521 0.479 56545 0.621 0.379 3399 19794 53146 43677 29264 Ex.Sh: Ag In&Sr Sav. Rate 72941 0.323 0.677 0.160 11704 16395 56545 19794 53146 43677 29264 72941 11704 3399 3399 State the Stopler-Samuelson and Rybczynski theorems IN THE CONTEXT OF THE above economy, and provide an "intuitive" explanation regarding the proof of each. 2 Theory: the three sector model This question asks you to describe, specify, solve and interpret the three sector small-open-competitive economy. Sectors are indexed j = m(M anf:); a(Agric:); s(Serv:) in which the service good, j = s; is only traded in the domestic economy at an endogenous price ps . Consider the following neoclassical …rm level production functions ym = f m (`m ; km ) ya = f a (`a ; ka ; h) ys = f s (`s ; ks ) where `j ; kj are stocks of labor and capital, and h (land) is only employed in the production of good j = a: h is traded freely and competitively among producers in sector P j = a; so that in equilibrium, the total supply of land is rented, i.e., H = h: The household utility function is u (qm ; qa ; qs ) 2 0 0 0 0 0 0 0 0 0 were qj , are in units of yj : Households own the country’s entire stock of labor L and capital K and land H: Dispensing with a statement about the modeled economy’s environment, and the …rm/household optimization problem, proceed as follows: 1. Characterize equilibrium 2. Derive, in symbolic form, the reduced form equations for the model’s key variables fw; r; ps ; Ym ; Ya ; Ys g ; and state their "properties" 3. Given the economy: Activities Commodities Resources AccumTrade Morocco Ag Ind. Serv. Ag Ind. Serv. Labor Capital Land Households ulation Prod. Act Ag 16395.14 0 Prod. Act In 12389.31 3399.159 Prod. Act Sr 40756.93 Comm. Ag 19794.3 Comm. In 5750.529 6638.786 Comm. Sr 40756.93 Labor 8549.716 8993.487 26133.83 Capital 6665.225 6794.986 14623.1 Land 1180.198 Households 43677.03 28083.31 1180.198 Accumulation 6638.786 Trade 3399.159 16395 15788 40757 19794 12389 40757 43677 28083 1180 72941 6639 3399 Share: Labor 0.52 0.57 0.64 Share: fd. 0.421 Capital 0.41 0.43 0.36 mnf 0.230 Land 0.07 ser 0.348 sav 0.160 State the Stopler-Samuelson-like and Rybczynski-like properties of the factor rental rate and supply functions, respectively, and state the properties of the reduced form home-goood price equation. 3 Sum 16395 15788 40757 19794 12389 40757 43677 28083 1180 72941 6639 3399 Check 0 0 0 0 0 0 0 0 0 0 0 0 3 Policy Application: The transition of resources from agriculture _ Virtually all studies of economic growth …nd that capital deepening (K=K _ L=L > 0) is one of the essential necessities to increasing real GDP per capita. Another feature,what Prof. Bruce Johnston (1970) termed "the one essential law of development" is the transition of labor from agriculture. The three sector model discussed in class is used to provide a future "snap-shot" or possible picture of at least the "direction" of forces the Greek economy would likely face if her capital to labor ratio were to double at some future point in time. The base period factor and sectoral shares are given by the following table. Agric. Mnf Service Share: Labor 0.52 0.51 0.39 Capital 0.43 0.49 0.61 Land 0.05 Sec. share in economy 0.10 0.12 0.78 Question 1. Explain, in more general terms, the Rybczynski e¤ects on the economy’s "transition" caused by capital deepening (recognizing of course that this also a¤ects the price of home goods). I am looking for: why the model predicts these adjustments. 2. Now, focus on agriculture and be more analytical in your presentation. Explain (a) the forces causing agriculture’s share of labor force to decline, (b) the forces causing total capital employed to decline (although capital per worker has increased and pro…ts per farm worker has increased) Although not necessary to answer this question, the following table shows the results from a simulation in which the capital stock is doubled.The …rst table is the base solution, the second is the simulation. 4 Base Solution y1 = y2 = y3 = GDP = L1 = L3 = L2 = K1 = K3 = K2 = p3 w r r´K p C1 C2 C3 Gc Tax Sav Disp TradeY1 TradeY2 Utility Trade Balance Pindex Real GDP Real Disp = Real Ex Rt = Increase K stock by 30% 31796.7 y1 = 25433.9 y2 = 197969. y3 = 255200. GDP = 0.149758 L1 = 0.726784 L3 = 0.123458 L2 = 225054. K1 = 1.71589 ´ 106K3 = 155047. K2 = 1. p3 107126. w 0.07 r 146719. r´K 1355.07 p 51839.6 C1 34024.4 C2 143769. C3 54200.4 Gc 7703.13 Tax 17864. Sav 229633. Disp -37906.9 TradeY1 -8590.42 TradeY2 92240.5 Utility -46497.3 Trade Balance 1. Pindex 255200. Real GDP 229633. Real Disp = 1. Real Ex Rt = 5 44379.6 20720.8 231749. 290293. 0.183945 0.727541 0.0885136 357775. 2.22313 ´ 106 143873. 0.971707 121730. 0.0614577 167459. 1103.97 58968. 38703.1 168300. 63448.7 8762.42 20320.5 261210. -34908.9 -17982.3 106827. -52891.2 0.982191 295556. 265946. 1.02912 4 Policy Application: Financial crises Setting Many capital in‡ows come about when domestic …rms and government borrowing from domestic and foreign banks and other non-governmental …nancial institutions (we say non-governmental to eliminate from consideration "o¢ cial" sources of debt) to …nance domestic investments, pay for the imports of goods and services, and to cover …scal de…cits (i.e., government expenditures exceeding revenues). The government may issue bonds for purchase by domestic interests, some of which may be re-sold to foreign interests. These activities tend to give rise to a situation where factor payments plus transfers to domestic households exceed the value of …nal goods and the value of intermediate good and other resource (petroleum, ores etc) exports. In this case, a country can be said to be "living beyond its means," particularly if the capital in‡ows do not yield a future income stream to remunerate principle and interest on the accumulated debt. This environment is conducive to some event that triggers a sudden change in creditor con…dence in the economy, causing them to request payment of debt and their reluctance to advance further credit. Recognizing this situation, holders of relatively liquid domestic assets may seek to with draw these assets to deposit them in foreign countries. This act can lower the resources available to the economy causing a decline in real GDP thus further decreasing a country’s capacity to meet its debt obligations. Question Consider an economy (Greece) having the following key characteristics. Agric. Mnf Service Share: Labor 0.52 0.51 0.39 Capital 0.43 0.49 0.61 Land 0.05 Sec. share in economy 0.10 0.12 0.78 Trade De…cit (Millions of 2007 $ = 18% of GDP) -8590 -37906 Start with the supposition that Greece is requirement to balance its …scal budget and begin a remuneration of its debt at a level that is 20% higher than that needed to meet …scal balances. 1. Using the results below, provide a short diagramatic description/explanation of the adjustments brought about by a …nancial collapse and the need to accommodate increased payments on principle and interest. 6 2. Now, narrow your focus to agriculture. Be more analytical, and explainnshow the adjustment in agricultural ONE OF the following: supply, factor allocations or farm pro…ts. Base Solution y1 = y2 = y3 = GDP = L1 = L3 = L2 = K1 = K3 = K2 = p3 w r r´K p C1 C2 C3 Gc Tax Sav Disp TradeY1 TradeY2 Utility Trade Balance Pindex Real GDP Real Disp = Real Ex Rt = Increase tax payments by 20% 31796.7 25433.9 197969. 255200. 0.149758 0.726784 0.123458 225054. 1.71589 ´ 106 155047. 1. 107126. 0.07 146719. 1355.07 51839.6 34024.4 143769. 54200.4 7703.13 17864. 229633. -37906.9 -8590.42 92240.5 -46497.3 1. 255200. 229633. 1. y1 = y2 = y3 = GDP = L1 = L3 = L2 = K1 = K3 = K2 = p3 w r r´K p C1 C2 C3 Gc Tax Sav Disp TradeY1 TradeY2 Utility Trade Balance Pindex Real GDP Real Disp = Real Ex Rt = 7 68482.9 24182.4 162409. 253931. 0.312554 0.573699 0.113747 500499. 1.44327 ´ 106 152218. 0.992959 110550. 0.0677926 142092. 1288.4 38702.2 25401.8 108096. 54313.3 64717.1 17775.1 171438. 12005.6 -1219.38 69170. 10786.2 0.995586 255057. 172199. 1.00709 5 Policy Application: E¢ ciency gains in service good provision Economists have tended to neglect the nontraded good sector’s e¤ect on the competitiveness of a countries traded good sector in international markets, and the e¤ects on agriculture in particular. In analytical models, the typical assumption is that traded good production functions are identical among trade partners. The reasoning being that competition in world markets provides strong incentive to employ the most e¢ cient technologies. However, by de…nition, home-goods do not face foreign competition, and hence homegood producing …rms almost surely have less incentive to adopt the most e¢ cient technologies. Consider the following economy: Greece 2007 Ag Ind. Prod. Act Ag Prod. Act In Prod. Act Sr Comm. Ag 20427.15 736.1278 Comm. In 4390.326 40732.06 Comm. Sr 3991.008 9660.337 Labor 13225.55 16042.9 Capital 10853.31 15753.77 Land 1355.073 Households Accumulation Government Taxes Trade Sum = WDI GDP 54242.42 82925.19 Share: Labor0.519996 0.504547 Capital 0.426726 0.495453 Land 0.053278 Serv. Ag Ind. Serv. Labor 54242.42 82925.19 343738 Capital Land 7207.951 76625.78 61935.1 77857.2 120112 Households Accumulation Government Taxes Trade 54242.42 82925.19 343738 62395.58 191451.7 343738 107125.7 146719.1 1355.073 255199.8 17863.99 465.1817 -11668 465.1817 116679.7 116679 34024.35 51839.55 17863.99 151006.7 117144.8 107125.7 146719.1 1355.073 17863.99 465.1817 465.1817 8153.163 108526.5 343738 62395.58 191451.7 0.393279 0.606721 343738 107125.7 146719.1 1355.073 Share: fd. mnf ser 255199.8 17863.99 117144.8 465.1817 0.143641 0.218852 0.637507 IO matrix Ag Ind. Serv. Comm. Ag 0.37659 0.008877 0.020969 Comm. In 0.080939 0.49119 0.222919 Comm. Sr 0.073577 0.116495 0.180181 Notation: yj (j = 1(industry), 2 (ag), 3(service); yjjk output from sector j thatPis allocated as an intermediate input to sector k, j; k = 1; 2; 3; yjnet is yj Lj share of workforce in sector j; Kj capital employed in k=m;a;s yjjk; P sector j; pvj = pj i=m;a;s pi ij ; j = m; a; s (value added price, sector j); w total wage, r rental rate of K; rent to …xed factor P (land), Disp disposable income (GDP - saving - taxes), T radeY j = yj tot:Dmnd; k=m;a;s yjjk s s price index = ps ; real GDP =GDP=ps ; Real exchange rate = price of traded goods/price of home good. 8 0 Simulation: Note the I-O coe¢ cients {0.074,0.117,0.180} in the last row of the table above, where, e.g., 0:074 = 3991=54242: Consider the e¤ect on this economy from a 20% increase in the e¢ ciency of service provision to each of the three sectors. Base Solution y1 = y111 = y112 = y113 = y1net = y2 = y221 = y222 = y223 = y2net = y3 = y331 = y332 = y333 = y3net = GDP = L1 = L3 = L2 = K1 = K3 = K2 = p3 pvm pva pvs w r r´K Decrease by 20% IO Coff. 82925.2 y1 = 40732.1 y111 = 4390.33 y112 = 76625.8 y113 = -38823. y1net = 54242.4 y2 = 736.128 y221 = 20427.1 y222 = 7207.95 y223 = 25871.2 y2net = 343738. y3 = 9660.34 y331 = 3991.01 y332 = 61935.1 y333 = 268152. y3net = 255200. GDP = 0.149758 L1 = 0.726784 L3 = 0.123458 L2 = 225054. K1 = 6 1.71589´ 10 K3 = 155047. K2 = 1. p3 0.383438 pvm 0.468894 pva 0.57593 pvs 107126. w 0.07 r 146719. r´K p 1355.07 p C1 51839.5 C1 C2 34024.4 C2 C3 151007. C3 Gc 117145. Gc Tax 465.182 Tax Sav 17864. Sav Disp 236871. Disp TradeY1 -108527. TradeY1 TradeY2 -8153.16 TradeY2 Utility 96474. Utility Trade Balance -116680. Trade Balance Pindex 1. Pindex Real GDP 255200. Real GDP Real Disp = 236871. Real Disp = Real Ex Rt = 1. {Real Ex Rt = 105284. 51714.7 2682.93 77086.5 -26199.7 33147.6 934.611 12483.1 7251.29 12478.6 345805. 9812.06 1951.13 49846. 284196. 270358. 0.191016 0.735293 0.0736916 284397. 1.7199´ 106 91689.9 0.99959 0.406775 0.483633 0.611616 113123. 0.0746098 156381. 854.118 54918.7 36045.3 160042. 124154. 492.813 18925.1 250940. -100044. -23566.7 102231. -123610. 0.999739 270429. 251006. 1.00041 Discuss, in the following order 1. Brie‡y, (on paragraph) tell the over-all "story", i.e., how the need to use less of the service good to produce a unit of output of all goods a¤ects this economy. 2. Now, more speci…cally: Explain the e¤ects on (a) factor payments (w, r) from changes in value added prices, i.e., why have they changed in the direction they did?. (b) on supply; 9 i. From the direct value added price e¤ect (for industry and services) ii. The direct (value added price) and indirect e¤ect (through w and r) on agricultural supply (Note, pulling resources from agriculture is important to this adjustment process) 3. Consider the trade imbalance; discuss the "second-best" implications of this result. 10 ...
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  • Spring '19
  • Economics, gross domestic product, Value added, disp, Real Ex Rt

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