ECON 301 GWU Intermediate Macroeconomics on Graduate Student Analysis
Description
The assignment consists of six parts: Understanding GDP, Labor share of National Income, Production approach to measuring the GDP, Measuring macroeconomic changes over time, Computing growth rates and Mathematical Properties of Growth Rates.
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ECON 301: Homework 1
January 18th, 2022
General guidelines
Answers must be clear, concise and legible (if hand-written). They
must demonstrate how you arrived at the solution, and make it clear
that you understand the underlying concepts.
Your submitted work must be original and submitted individually,
although you may work in groups to arrive at solutions. Academic
integrity is taken very seriously
1
Understanding GDP
1. By how much would GDP rise in each of the following scenarios? Explain,
with reference to the definition of GDP.
(a) An international graduate student spends $5,000 on tuition for a
semester. She also works as a research assistant, earning $2,000 per
semester. Over the summer that same year, she decides to return to her
home country for a vacation, buying an air ticket for $800 from a local
travel agency. However, the airline is a foreign airline.
(b) You want to buy a used car from a friend. The friend offers to sell it to
you (i) in an as-is condition for $4,000, or (ii) after a complete tuneup, but for $4,500. You choose the latter.
(c) The economy goes into recession. To counter this, the government
decides to take a series of steps. First, it signs an infrastructure bill
(investing in infrastructure like roads, bridges etc.) for $100 million.
Next, it cuts tax rates by 5%, meaning a tax cut for industry amounting
to $5 billion (think carefully about this one). Finally, it increases
unemployment benefits by $200 million.
(d) A real estate agent sells a house for $200,000 that the previous owners
bought 10 years earlier for $100,000. The agent earns a commission of
$10,000 in the process. The new owners, in turn, convert the place into
an Airbnb and earn $15,000 that same year from value-conscious
holidayers.
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(e) An artist, who works at his home studio, sells 5 paintings making
$100,000. However, his oils are imported from abroad and cost
$20,000. Further, he cares for his ailing uncle who lives with him. These
services would be worth around $35,000 if they hired a parttime nurse.
However, the artist does not charge his uncle anything for the services.
(f) Mr.A buys a painting, Macroeconomist with Mustard Pot, from a gallery
for $100. Later that year, the same painters work, Les
Macro´economistes dAvignon, becomes an international sensation, and
the painters early work is much sought after. Mr.A discovers that his
Macroeconomist with Mustard Pot is now worth $3.5 million.
2. There are many critiques of GDP surrounding why it fails to measure
welfare. Read the article by Dr. Diane Coyle, Rethinking GDP and provide a
short summary of why there might be a need for a new measure of welfare.
2
Labor share of National Income
1. Read carefully the following article: https://www.moneyandbanking.com/
commentary/2017/6/4/labors-declining-share-a-primer
2. Below is a reproduction of a chart in the Cecchetti and Schoenholtzs article,
but with additional detail. Study it carefully and answer the following
questions.
(a) According to the chart, how many sectors have witnessed a decline in
the employee-only labor shares between 1997 and 2014? List them.
Which ones have experienced an increase in employee-only labor share?
2
(b) What does the blue line running diagonally across the chart represent?
What does it mean for the employee-only labor share of a sector (like
Finance, insurance, real estate etc.) to be on the line?
(c) Visually, which sectors appear to have witnessed the greatest declines
in labor share of national income? Which sectors appear to have seen
the greatest gains in labor share? Do you see any commonalities in the
kinds of sectors that have seen declines and the kinds of sectors that
have seen gains?
(d) The article proposes the rise of superstar firms (which dominate
their industry, take most profits and increase mark-ups) as one
possible reason for the fall in labor shares. The article gives the
example of Facebook and Google. Can you think of 2 other firms that
might fit this category? What sectors (in the chart) would they fall
under? Do those sectors indeed display declining labor share in the
chart?
3
Production approach to measure the GDP
Assume that the economy below only produces bread. Find the GDP using the
production/value added approach. Explain carefully.
A firm collects wheat seeds and sells them at $500 to a farmer. The farmer uses
the seeds to crop wheat, and sells the harvest at $1500 to a miller. The miller uses
the wheat harvest to produce flour, which is sold to a baker at $2100. Finally, the
baker buys the flour, makes some bread and sell it at $2600.
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Measuring macroeconomic changes over time
1. Describe, in your own words, the Laspeyres Index, the Paasche Index, and
the Fisher Index (chain-weighting).
2. Consider a country that only produces cars, cantaloupes and catamarans.
Complete the following table by filling in the missing entries.
Number of cars produced
FY 2014
100
FY 2015
125
Quintals of cantaloupes grown
5,000
4,650
Number of catamarans produced
450
600
3
Percent change
FY2014-15
Price of cars
$4,000
$4,050
Price of cantaloupes
$65
$80
Price of catamarans
$900
$1,000
Number of catamarans produced
450
600
Real GDP in 2014 prices
Real GDP in 2015 prices
Real GDP in chained prices
(benchmarked to 2015)
3. Calculate the inflation rate for the 2014-15 period using the GDP deflator
based on the Laspeyres Index, the Paasche Index, and the Fisher
(chainweighted) Index.
5
Computing growth rates
1. Define the Rule of 70
2. Country As current GDP is $1,000,000. It is growing at the rate of 2% per
year. It has a current population of 2,500 which is growing at 3% a year.
(a) Using the rule of 70, how long will it be before Country As GDP doubles
(round off to the nearest value)? What will its per-capita GDP be in that
year?
(b) Using the rule of 70, how long will it be before Country As population
doubles (round off to the nearest value)? What will its per-capita GDP
be in that year?
3. Country Bs current GDP is $500,000. It is growing at the rate of 8% per year.
It has a current population of 5,000 which is growing at 1.5% a year.
(a) Using the rule of 70, how long will it be before Country Bs GDP doubles
(round off to the nearest value)? What will its per-capita GDP be in that
year?
(b) Using the rule of 70, how long will it be before Country Bs population
doubles (round off to the nearest value)? What will its per-capita GDP
be in that year?
4. Approximately when will Country Bs per-capita income equal Country As?
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Mathematical Properties of Growth Rates
1. Use the rules for computing growth rates of ratios, products and exponentials
to calculate the following:
(a) A countrys real GDP is growing at the rate of 8% a year, while its
population is growing at the rate of 2.5% a year. How fast is its real per
capita GDP growing?
(b) A countrys real GDP is growing at 4%, but it is also experiencing a high
rate of inflation (price level increase) of 10%. How fast is its nominal
GDP growing?
(c) The government wants to raise the taxes collected by 10%. However,
the tax base is only growing by 2.5%. By how much should it raise the
average tax rate to meet its target tax collection? (Hint: Total taxes
collected equals the tax base times the average tax rate)
(d) A countrys nominal GDP is growing at the rate of 16%. Its price level
is growing at the rate of 8%, and its population is growing at 2%. How
fast is its real per capita GDP growing?
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