Assignment

1. 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 improvements 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. Suppose 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 definitions 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 product?

9. How would a statistician charged with measuring national product accounts 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 productivity 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 individual 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 model.]

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 substitution 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 substantial change in its price.

13. Eventually we will use our household to stand in for an average household 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 assuming 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 assumption?

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?