Part A: Short Questions (50 points)
- (5 points) Which of the following would be considered to be a final good in the calculation of US GDP?
- Engines manufactured in Michigan for Ford cars that will be sold to customers in the United States.
- Haircuts given at barbershops in Detroit.
- Warships purchased by the US government for the United States Navy.
- (5 points) By how much would GDP change in each of the following circumstances? Briefly explain your answers.
- A parent switches from buying pre-made smoked salmon and cream cheese bagels for a family dinner, which cost $27, to buying the raw ingredients, which cost $12, and making the same bagels at home.
- A famous rock star marries her butler, whom she formerly paid a wage of $50,000 per year. After they are married, her husband continues to wait on her as before, and she continues to support him as before – but as a husband rather than an employee, that is, not with a regular salary.
- (15 points) The table below reports per capita GDP and capital per person in the year 2007 for 10 countries. Your task is to fill in the missing columns of the table.
- Given the values in columns 1 and 2, fill in columns 3 and 4. That is, compute per capita GDP and capital per person relative to the US values.
- In column 5, use the production model (with a capital exponent of 1/3) to compute predicted per capita GDP for each country relative to the United States, assuming there are no TFP differences.
- In column 6, compute the level of TFP for each country that is needed to match up the model and the data.
- Comment on the general results that you find.
| In 2005 dollars | Relative to the U.S. values (U.S. = 1) | |||||
| Country | (1) Capital per person | (2) Per capita GDP | (3) Capital per person | (4) Per capita GDP | (5) Predicted GDP per capita | (6) Implied TFP to match data |
| USA | 135,877 | 42,887 | ||||
| Canada | 116,198 | 36,165 | ||||
| France | 109,013 | 29,638 | ||||
| Hong Kong | 123,248 | 43,124 | ||||
| South Korea | 104,864 | 23,860 | ||||
| Indonesia | 9,947 | 5,187 | ||||
| Argentina | 35,172 | 15,276 | ||||
| Mexico | 33,165 | 11,201 | ||||
| Kenya | 2,379 | 2,021 | ||||
| Ethiopia | 585 | 1,134 |
- (10 points) The following table gives data for a small country, Magnolia:
| Component | Expenditure ($) |
| Social Security payments | 250 |
| Depreciation | 40 |
| Private investment | 450 |
| Exports | 270 |
| Imports | 310 |
| Salaries earned by foreigners working in Magnolia | 170 |
| Household consumption | 920 |
| Purchases of raw materials by firms | 260 |
| Government purchases | 940 |
| Capital Income | 310 |
| Salaries earned by Magnolian Residents working abroad | 350 |
- Use the data to calculate GDP for this economy using the expenditure method.
- Calculate the value of Magnolia’s GNP. Does Magnolia’s GDP differ from its GNP? Why or why not?
- (15 points) Using data from the Penn World Tables (which can be downloaded from https://www.rug.nl/ggdc/productivity/pwt/), construct two plots:
- A
time-series plot that shows the level of real GDP per capita in Australia and
Taiwan
- A time-series plot that shows the annual growth rates of real GDP per-capita in Australia and Taiwan
- Comment on what you notice about real GDP in these two countries over the last 70 years.
Useful information: The Penn World Tables contain two different measures of real GDP (rgdpe and rgdpo), which differ based on whether they were constructed using the expenditure or production definitions of GDP (remember Lecture 1?). Although it won’t matter much which variable you use, you should use rgdpo. In order to construct real GDP per capita, you will also need to use the variable pop to construct real GDP per capita.
