Is this properly accounted for in GDP?

What are two methods Diane Coyle broadly mentioned for measuring output

in the financial sector? What assumptions must be made about the

opportunity costs of various participants in the market in order to

derive each? Which measure does Coyle prefer? Why do you think

many economists/National Income Accountants prefer the other?

2. If the value of the financial sector is in terms of reducing the individual

risk in the economy, how could you measure the value of the financial

sector without using information on loan payments? If we think of the

amount of individual risk remaining after individuals buy portfolios is

a measure of the ineffectiveness of the financial sector, what do you

think accounts for this.

3. How do you think marketing/advertising services affect the welfare of

the country? Is this properly accounted for in GDP? How should we

think of the value of convincing a customer to change from a rival’s

inferior product.

4. Explain the relationship between unobserved technological improve-

ments in products, the measurement of inflation, and the measurement

of welfare over time.

5. Describe the behavior of consumption, investment, labor, productivity,

wages, the price level and the money supply over the business cycle bothin terms of correlation, magnitude and lead vs lag. Give the economic

intuition behind the results on consumption, productivity, wages and

price levels. For some of these rather than the intuition you should

explain the importance of this evidence in terms of supporting/rejecting

important theories in economics.

6. The most commonly used measure of the money supply (M1) consists

of a term (currency) that is directly controlled by policy and another

term that is influenced by both policy and economic activity (Debit

Cards). Given this and a general rule that the Fed wants to increase

the amount currency during a downturn, what should be the offsetting

effects in terms of the relationship between GDP and money supply.

If instead of money, we want to look at the supply of all liquid assets,

what effect should we see? Why might some assets be more liquid

during different parts of the business cycle?

7. How do national product accounts record research and development

spending? Can you think of an argument for classifying such spending

as an intermediate good? Can you think of an argument as treating

R&D as adding to a stock of a factor of production. How would you

name such a factor of production?

8. Suppose an economy has two years worth of data, years 1 and 2. Sup-

pose there are also two goods, bread and corn. Suppose in year one fifty

units of corn are sold at a price of 1 $ and 20 units of bread are sold at

a price of 2 $. Suppose in year two, 60 units of corn are sold at a price

of 1.5 $ and 80 units of bread are sold at a price of 2.05 $. Compute

nominal GDP in both periods. Compute real GDP under both defini-

tions of a base year. Compute also chain weighted real GDP. Compute

the CPI’s with each base year. What are the implications for these

measures for the amount of inflation in this economy. What about the

amount of economic growth? What if corn in year 2 is twice as valuable

as corn in year 1 to consumers in terms of their enjoyment from the


9. How would a statistician charged with measuring national product ac-

counts distinguish pure price increases from productivity increases in

the cell phone industry? Why might you be asked to do this? Be as specific as possible about the method you would employ. [Hint, a pro-

ductivity increase on a fixed model of a cell phone would lower its cost

of production. Thus for productivity increases to raise the cost of a cell

phone, the quality of the typical phone must increase.]

10. Suppose an individual has 40 hours to work. Suppose also the indi-

vidual has a net wealth outside the labor market of 100$. Suppose

the wage rate is equal to 10 $ per hour. Graph the budget constraint.

Suppose the marginal rate of substitution between consumption (C)

and leisure (l) is equal to C/l. What will a utility maximizing consumer

choice between labor and consumption be? Suppose the wage falls to 5

$ per hour. What is the new choice of labor vs. consumption. Interpret

this in terms of substitution and income effects. Use a graph to do this.

[Note: if both of these numbers lie at the border of what is feasible for

the consumer to choose, feel free to increase the number of hours in the


11. How will the following events/policies affect the consumer’s choice of

labor supply if at all? Be specific as possible about income and substi-

tution effects:

(a) A raise in wage rate

(b) A labor income tax on all income.

(c) A labor income tax on all labor income beyond the first 20 hours.

12. What is the price of leisure in our simple static model. Give a graphical

example where leisure could behave like an inferior good for a substan-

tial change in its price.

13. Eventually we will use our household to stand in for an average house-

hold in the US economy. How might you use the ”representative”

household to understand issues like unemployment, the decision to be

a homemaker and early requirement. How might such a representation

understate the costs of employment? On a second note, we are assum-

ing the loss a household due to lack of employment is offset partially

by a gain in leisure. For what policy questions might that be a fair

assumption? What aspects of unemployment may be missing by that


14. Consider an economy which experiences the destruction of some of the

nation’s capital stock (say through a hurricane is destroyed). How

should this effect equilibrium, consumption, output and labor supply?

Now, let’s say the government tries to offset some of the effects of the

decline in capital by increasing government spending. What is the likely

outcome of this policy intervention in terms of restoring consumption,

output and labor supply to its pre hurricane levels?

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