Econ 201 Spring 2020 Midterm Two
1. Suppose that a nation increases their investment in research and development by funding a system of higher education - that is, research universities like the University of Washington. Depict and explain the effect this will have on this nation’s labor productivity curve. 5 points.
This will cause and upward shift of the productivity curve.
2. For each of the following, indicate wether the transaction described represents an increase in US value-added in the 2019, and when it represents an inccrease in US Aggregate Spending, and if so which part. 5 points each.
(a) The purchase in 2019, by Boeing, of steel, which was manufactured in Gary, Indiana, for use in producing 777x airplanes.
Yes an increase in value added, but not part of aggregate spending; it is an intermediate good.
(b) The purchase in 2019, by Warren Buffett, of Wells Fargo, a U.S. Bank, which he will then control and operate to produce financial services.
Not an increase in value added or aggregate spending; this is a financial transaction.
(c) The purchase in 2019, by a fishing company in Seattle, a boat constructed in 2019 by Fishermen’s Finest, a boat construction company in Kirkland, WA, for use in catching fish in 2020.
Yes an increase in value-added, yes part of aggregate spending; this is investment.
Figure 1: Output and prices in a simple economy
For the following questions, refer to figure 1.
3. Using prices in 2018 as a base year, calculate real GDP in 2018 and 2019. 5 points.
We calculate it thus:
rGDP18 = 200 ∗ 3 + 250 ∗ 35 + 30 ∗ 8 = 9590
and
rGDP19 = 75 ∗ 3 + 240 ∗ 35 + 29 ∗ 8 = 8857
4. Using 5 unit of Steel, 50 units of Gasoline, and 10 units of Cotton as your market basket and 2018 as a base year, calculate the inflation rate between 2018 and 2019. 5 points.
We calculate it this:
cost18 = 5 ∗ 35 + 50 ∗ 3 + 10 ∗ 8 = 405
and
cost19 = 5 ∗ 45 + 50 ∗ 1 + 10 ∗ 6 = 335
so
and
so the inflation rate is = −.1228 or −12.28%.
Figure 2: Labor Productivity
5. For this question, refer to figure 2. If a country at point A were to increase their labor pro-ductivity, and reach point D, what share of the growth in their labor productivity would be due to improved technology? 5 points.
The total rise in labor productivity is 100,000-40,000 = 60,000. Of that 100,000-55,000 = 45,000 is due to rising TFP. So, (45,000 / 60,000) = 75% is due to rising TFP.
Figure 3: Nominal GDP, Real GDP, and population, in 2018 and 2017, for France and Greece
6. For this question refer to figure 3. Consider the following claim: “The growth rate of GDP in France from 2017 to 2018 was higher than it was in Greece, and even accounting for changes in prices by using real GDP, it still grew faster. We can therefore conclude that living standards rose faster in France during that period than they did in Greece. ”
(a) Explain why this statement is not correct. 5 points
Even though real GDP grew faster, real GDP per capita did not necessarily grow faster.
(b) Using the table above, calculate the correct comparison of the rise in the standard of living a person living in France compared to Greece. 5 points. We calculate real gdp per capita in each country, in each year:
So in France, the growth rate was = 1.8%. In Greece we have
so that the growth rate was = 2.3%. Greece was growing faster.
Figure 4: Labor Force Participation (also called activity) Rate (Right Scale, Dashed) and Unem-ployment rate (Left Scale, Solid), for France from 2010-2020.
For the following questions, refer to figure 4.
7. From figure 4 we can see how the unemployment rate and the Labor Force Participation Rate (called the Activity Rate in this graph) in France evolved following the 2011 European Debt Crisis. We can see that by 2017, unemployment had returned to its 2011 levels, and by 2020 was well below that level. Can we conclude, from the information presented in this chart, that the labor market had entirely recovered from the 2011 debt crisis recession by 2020? Explain why or why not. 5 points.
No, we cannot conclude that, because the activity rate fell and did not recover, indicating the labor force is still smaller than it was before the crisis. Some workers left the labor force and did not return.