Mid-Term Test

Part I - Answer questions 1 -3.

Question 1. Robert Kennedy, when seeking the Democratic presidential nomination in 1968, remarked that GDP measures everything except that which makes life worthwhile. (The New York Times, September 1, 2008).  Explain and comment.

Question 2. New-home sales fell to an annual pace of 250,000 in February, an all-time low in records dating to 1963, the Commerce Department reported March 23. Existing-home sales dropped to a 4.88 million annualized pace in February, down 2.8 percent from a year earlier, the National Association of Realtors said, while the median price of existing homes fell to $156,100, the lowest since February 2002. (Bloomberg, March 29, 2011)

a. Where do new-home sales appear in the circular flow of expenditure and income? Explain how a fall in new-home sales affects real GDP.

b. Where do sales of previously owned homes appear in the circular flow of expenditure and income? Explain how a fall in sales of previously owned homes affects real GDP.

Question 3. The United Nations Human Development Report gives the data for 2011 in the following table.

Other information suggests that household production is similar in Canada and in the United States and smaller than in China and Russia. The underground economy is larger in Russia and China and a similar proportion of each of these economies. Canadians and Americans enjoy more leisure hours than do Chinese and Russians. Canada and the United States spend significantly more on the environment than do China and Russia.

a. In which pair (or pairs) of countries is it easiest to compare the standard of living? In which pair (or pairs) is it more difficult? Explain why.

b. Do the differences in GDP per person rank correctly the standard of living in these countries? What additional information would we need to be able to make an accurate assessment of the relative standard of living in these four countries?

 Part II - Answer questions 4-8.

Question 4. From independence in 1947 until the 1990s, there was in place in India what came to be known as the "Paper Raj". The term referred to a series of rules and regulations that put strict control on business and forced business owners to navigate in a bureaucratic labyrinth in order to start and run their companies. For example, one entrepreneur complained that simply to import a computer, he had to make 50 trips to New Delhi to get the necessary permits. Starting in the 1990s, many of these restrictions were abolished and a series of reforms made it easier for firms to conduct business.

Illustrate the situation using a graph showing the returns to and opportunity cost of entrepreneurship. Denote the curves and equilibria with the dates corresponding to the events you consider. (For example, you can use the names: "80" and "90" to denote the curves and equilibria in 1908s and 1990s)

Question 5. The graph shows the demand for and supply of labor in a market with a minimum wage set at $4 per hour.

a. How many workers will be unemployed due to the minimum wage?

b. What will happen if the minimum wage is set at $7 per hour?

Question 6. The following data pertain to US, in 1989: Output = $4.492 trillion, Consumption = $3.611 trillion, Gross Investment = $0.880 trillion, Depreciation = $0.663 trillion, Capital Stock = $6.946 trillion, Employment = 121.863 million workers.

a. Find the growth rate of the physical capital stock between years 1989-1990.

b. What will the capital stock be in 1990?

Question 7. Suppose an earthquake destroys a large part of the capital stock. Everything else (namely, technology, human capital, and labor force) remain the same.

What happens to the capital stock and economic growth in the short and the long run? Demonstrate the adjustment process in the diagram of the Solow model.

Part III - Answer one of the questions 9 - 11.

Question 9. In the homework, we have calculated the long-term equilibria of two growing under different assumptions related to the form of the aggregate production function. In the first, proposed by Robert Solow, the aggregate production function exhibits diminishing returns to capital accumulation (Y = Ak^a, 0 < a < 1). In the second, proposed by Paul Romer, the aggregate production function exhibits constant returns to capital accumulation (Y = AK).

a. Compare the predictions of the two models about long-term growth in the absence of technological progress. Demonstrate your answer with the corresponding growth diagrams.

b. Compare the predictions of the two models about short-term and long-term economic growth about the importance of the saving rate in each of these models?  Demonstrate your answer with the corresponding growth diagrams.

Question 10. In the lectures we have considered institutions as a potential cause of differences in capital accumulation among different countries. Another explanation might be different technologies available to different countries.

Suppose that there are two different types of technology available, which depend on the level of existing capital stock. In particular, assume that at low levels of capital stock the only available technology exhibits strong diminishing returns to capital. In contrast, assume that at high levels of capital, there is the possibility of investing in a technology with sufficiently high constant or increasing returns.

a. Draw a Solow diagram (assuming a constant saving and depreciation rate.

b. Explain how both a "poverty trap" and "endogenous growth" may arise and demonstrate in a diagram.

c. The Solow model gave a picture of the world in which poorer countries catch up with the richer. What picture of the world does this theory give?

Question 11. Critically appraise the Theory of Extractive versus Inclusive Economic Institutions.

Need this assignment completed in full excluding 1,3 and 11.?