discussion session 6. outline measuring production spending allocation model growth accounting...
TRANSCRIPT
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Discussion Session 6
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Outline
• Measuring Production• Spending Allocation Model• Growth Accounting Formula• Quantity Equation of Money
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Measuring Production
• Spending Approach• Income Approach• Production Approach
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Measuring Production
Spending Approach (Expenditure approach) Y= C + I + G + X
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Measuring Production
Income Approach Y = Labor Income (wages, salaries and fringe benefits) + Capital Income (profits, rental payments, and interest payment) + Depreciation + Tax – Subsidy + Net income of foreigners
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Measuring Production
Production Approach: Sum of the value added by each of the manufacturers. (value of a firm’s production less the value of the intermediate goods used in the production)
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Question 1 Which components of GDP (spending approach) will be affected by each of the following transactions involving a farmer in the United States, and why?a. The farmer buys a used tractor from a friend, to be used for his farming
businessb. The farmer has a mechanic replace one of the tractor parts with a new one.c. The farmer sells corn overseas.d. The farmer uses some of the corn to make cornbread for his family.e. The farmer receives a subsidy from the government.f. The farmer buy a new four-wheel-drive vehicle to use on vacationg. The farmer buys a newly constructed house
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Question 1
a. The farmer buys a used tractor from a friend, to be used for his farming business
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Question 1
a. The farmer buys a used tractor from a friend, to be used for his farming business
There is no change in GDP, because the tractor is a used good
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Question 1
b. The farmer has a mechanic replace one of the tractor parts with a new one.
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Question 1
b. The farmer has a mechanic replace one of the tractor parts with a new one.Investment will increase by the cost of the tractor part and mechanic service, so GDP increases
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Question 1
c. The farmer sells corn overseas.
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Question 1
c. The farmer sells corn overseas.Net export will increase, because the farmer is exporting corn. GDP increases
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Question 1
d. The farmer uses some of the corn to make cornbread for his family.
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Question 1
d. The farmer uses some of the corn to make cornbread for his family.Home production is not included in GDP
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Question 1
e. The farmer receives a subsidy from the government.
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Question 1
e. The farmer receives a subsidy from the government.This is a transfer from the government to the farmer; it does not count towards GDP
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Question 1
f. The farmer buy a new four-wheel-drive vehicle to use on vacation
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Question 1
f. The farmer buy a new four-wheel-drive vehicle to use on vacationThis is counted towards Consumption. GDP increases
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Question 1
g. The farmer buys a newly constructed house
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Question 1
g. The farmer buys a newly constructed houseThis is counted towards Investment (Residential Investment). GDP increases
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Measuring ProductionQuestion 2: Given the data, calculate Investment, Net Exports, and GDP –using spending approach
Components of Spending Value (billion of US$)Consumption $140
Business Fixed and Residential Investment $27
Inventory Stocks at the end of 2007 $10
Inventory stock at the end of 2008 $5
Government Purchases $65
Exports $21Imports $17
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Spending Allocation Model
• Y=C+I+G+X• Dividing both sides by Y,• 1= C/Y + I/Y + G/Y+ X/Y• Which says that the sum of shares of spending in GDP must equal one
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Question 3Suppose the government introduces a new tax policy that encourages investment. Using diagrams, showing what will happen to real interest rate. What will happen to the spending shares of GDP in the long run.
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Suppose the government introduces a new tax policy that encourages investment. Using diagrams, showing what will happen to real interest rate. What will happen to the spending shares of GDP in the long run.
Question 3
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Production function
Production function with technology:• Y = F(L, K, T)
• where T = technology
Y = GDP
K = capital input
L = labor input
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Growth Accounting FormulaThe growth accounting formula states that
Growth rate of productivity
Growth rate of capital per hour of work
Growth rate of technology= +
1
3
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Question 4
In country A, capital per hour of work from 1950 to 1973 grew by 3 % per year and output per hour of work grew by about 3% per year. Suppose that from 1973 to 1991, capital per hour of work did not grow at all and output per hour of work grew by about 1 % per year. How much of the slow down in productivity (output per hour of work) growth was due to technological change? Explain.
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Question 4
In country A, capital per hour of work from 1950 to 1973 grew by 3 % per year and output per hour of work grew by about 3% per year. Suppose that from 1973 to 1991, capital per hour of work did not grow at all and output per hour of work grew by about 1 % per year. How much of the slow down in productivity (output per hour of work) growth was due to technological change? Explain.2% decline in productivity growth3% decline in growth rate of capital per hour of work
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Question 4
In country A, capital per hour of work from 1950 to 1973 grew by 3 % per year and output per hour of work grew by about 3% per year. Suppose that from 1973 to 1991, capital per hour of work did not grow at all and output per hour of work grew by about 1 % per year. How much of the slow down in productivity (output per hour of work) growth was due to technological change? Explain.2% decline in productivity growth3% decline in growth rate of capital per hour of work-- But only one-third of the capital growth rate impacts productivity1% decline in productivity growth can be explained by decline in growth rate of capita per hour of workThe other 1% is explained by slowdown in technology growth
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Quantity Equation of Money
• MV = PY• M is money supply• P is the price level (sometimes called the GDP deflator)• V is the velocity (a measure of how quickly money is turned over in
the economy)• Y is real GDP
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Question 5—The Fed and Money Supply• If the Federal Reserve increases the money supply in the U.S. by 10%
in 2014, while real GDP increases by only 2%; what will be the long run effect on prices?
• MV = PY • Money growth + velocity growth = inflation + real GDP growth• Inflation = money growth + velocity growth- real GDP growth= 10% + v% -2% = 8% + v%If velocity doesn’t change, inflation would be 8%
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Question
• Suppose personal income tax rates are cut. Using a diagram, show what will happen to real interest rates. What will happen to the spending shares of GDP in the long run.
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Question
• Suppose personal income tax rates are cut. Using a diagram, show what will happen to real interest rates. What will happen to the spending shares of GDP in the long run.
The C/Y* shifts right; this shifts NG/Y* right also. Interest rates will rise. I/Y*and X/Y* shares will fall.