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Macroeconomics Understanding The Wealth Of Nations 2nd Edition David Miles, Andrew Scott - Solutions
(8.5) What can governments do to ease the distributional effects of trade within a country?
(8.4) World coffee prices have fallen sharply in recent years as supply has increased. Can coffee producers learn anything from the actions of oil exporting nations in using OPEC as a cartel to raise oil prices?
(8.4) What is the comparative advantage of your country? Can the Heckscher-Ohlin model explain it?
(8.3) In some OECD countries, agriculture is heavily protected, and governments provide public support at least in part to preserve traditional life styles. What are the merits and demerits of using trade restrictions to achieve this aim?
(8.2, 8.7) The automobile manufacturer VBW is threatening to remove production from your country because productivity in its plants is too low. However, if the government pays a large enough subsidy, the firm will stay. Examine the merits and demerits of such a policy for the firm, government, and
(8.2) Very few individuals are self-sufficient and most engage in the marketplace. Why then do so many people not accept the theory of comparative advantage?
(8.2) Review your transactions in the marketplace over the last week. What is your comparative advantage?
(Section 8.1) Why is world trade rising faster than world output? Why is so much trade in manufactured goods?
(7.7) Suppose the probability of a worker losing his or her job in a year is 2%. The probability of someone unemployed finding a job within a year is 40%. What is the equilibrium unemployment rate? What happens if the government takes measures to free up the labor market that will double the
The government now decides to charge income tax on wages at a rate of 15%. Companies have to pay tax on their profits of 20%;profits per unit produced are simply price minus cost, and the cost is the wage. Assume that firms continue to want to get a net of tax profit margin of 20% of costs. Labor
(7.4) Consider the economy described in Question
(7.4) In an economy, firms set prices at a markup of 20% over costs. Costs are all in the form of wages, so that P (1.2) W. Labor unions enter into bargains with firms on wages. The higher is unemployment, the less powerful are unions and the lower is the real wage they can achieve in negotiations.
(7.2) Using a spreadsheet, consider the Cobb-Douglas production function:where Yt is output at time t; Kt is capital; Lt is labor hours worked; At is total factor productivity at time t; and b is 0.3. Analyze how the marginal productivity of labor changes when:(a) A increases by 10%(b) K increases
(Section 7.2) A family has a target of $1500 for the income that it needs to earn each week.Both adults in the family work at flexible jobs where they have a choice over how many hours to work. They decide that the relative number of hours they should work should be equal to the ratio of their
(7.10) How might government policy respond to the redistributive impacts that immigration brings about? Why do governments often restrict immigration to areas where there is a shortage of skilled workers?
(7.10) How might consideration of the tax and benefit system alter the finding of a migration surplus for countries?
(7.9) The United Kingdom and the United States have highly deregulated labor markets and have also seen much larger increases in inequality than has continental Europe, due to declining demand for unskilled workers. What might explain this difference?
(7.9) What type of workers have computers displaced and why have they increased the demand for skilled labor? Will skilled labor and computers always be complements in production?
(7.8) Is there a link between the flexibility of U.S. labor markets and its large prison population?
(7.7) If generous welfare payments support the long-term unemployed, is employment protection legislation a good thing?
(7.5) How do the following affect the natural rate of unemployment: (a) an increase in tariffs on imported goods, (b) making unemployment benefits taxable, (c) more expenditure on retraining programs for the unemployed, (d) increases in indirect taxes on product prices, and(e) increases in income
(7.3) What influences the wage demands you make of your employer?Conceptual Questions 163
(7.2) If the population was prepared to work substantially longer hours for higher wages, what would be the long-run impact of capital accumulation and technological progress on the labor market?
(7.1) In Greece, the participation rate (as percentage of working-age population) in 1998 for men aged 15–24 was 44.3%; aged 24–54, 94.2%; and aged 55–64, 57%. For the United States, these numbers were 68.4%, 91.8%, and 68.1%. In Greece, the corresponding figures for women were 37.3%, 59.4%,
(Section 7.1) A country has a working age population of 70 million, a total population of 100 million, unemployment of 5 million, and employment of 45 million.(a) What is its labor force?(b) What is its participation rate?(c) What is the participation rate as a proportion of the working-age
(6.3) Draw the MPK schedule so that, over a certain initial range of capital, there is increasing MPK and then this is followed by diminishing MPK until the MPK declines to a level higher than that achieved in poor countries. What pattern of cross-country growth will this produce? How does this
(6.3) Repeat the analysis of Figure 6.10 when the high investment rate economy also has access to more productive technology. What does this imply about the scale of inequality we should expect to find across countries?
(6.3) Suppose that two economies share a common steady state so that there is convergence between them. The poorer country closes 2% of the income gap between them each year.What proportion of the initial gap in income between the two countries is closed after 20 years? After 40 years how much of
(Section 6.1) Assume that there are no diminishing returns to capital and that, as shown in Figure 6.1, output is simply a constant proportion (a) of the capital stock. Investment is also a constant fraction (b) of output, and depreciation is a proportion (d) of the capital stock.The change in the
(6.6) If it is good institutions rather than good policies that matter, what implications does this have for aid agencies?
(6.6) Does it matter if development aid just boosts government consumption in poor African economies? Why or why not?
(6.5) What incentives do pharmaceutical companies have to undertake R&D in medicines for treating AIDS? Malaria? Erectile dysfunction? What can policymakers do about this?
(6.5) What steps can a country take to change its institutions? What difficulties might it experience?
(6.4) What role can governments play in improving the steady state? What does this imply about the relationship between the size of government and GDP per capita?
(6.4) Do empirical studies of the determinants of the steady state tell us anything more than that the richest economies are OECD economies? Are OECD economies a successful blueprint for emerging nations, and can their key factors be easily transplanted? Why?
(6.3) Can conditional convergence explain any pattern of cross-country differences in standards of living?
(6.2) If individuals live in an area characterized by a poverty trap, will they not just move to a prosperous region? Should policymakers therefore worry about poverty traps?
(6.1) Can human knowledge and ingenuity support a constant MPK?
(Section 6.1) Do models that assume decreasing MPK offer a theory of economic growth?
(5.6) Use Table 5.9. How is the economy likely to respond if, as a result of B2B innovations, the cost of lumber falls from $1000 to $750 and this is passed down the value chain in terms of lower prices? What will happen to GDP/value added?
(5.4) What explanations can you suggest to explain Figure 5.13? Why do some countries do more R&D than others? Does this matter?
(5.4) What difference is there between invention and innovation? How do these affect the marginal product of capital over time?
(5.3) Consider Table 5.4 and assess the relative importance of investment, education, and TFP in explaining cross-country income differences.
(5.3) The quality of financial institutions is important for the level of TFP. Consider the merits and demerits of bank-based systems compared to those relying upon equity markets.Should governments privatize the financial system or leave it under state control?
(5.3) On the Web, visit http://info.worldbank.org/governance/ and compare the institutional quality of two countries of your choice.
(5.2) What do you think accounts for the results of Table 5.3?
(5.2) Consider an economy in which output in period t is produced by the Cobb-Douglas production function:Yt is output at time t; K t is capital at time t; Lt is labor employed at time t; At is TFP at time t;HKt is human capital; and a and b are both greater than 0.(a) What happens to GDP when
(Section 5.1) Consider an economy in which output in period t is produced by the CobbDouglas production function:Yt is output at time t; Kt is capital at time t; Lt is labor employed at time t; At is TFP at time t.(You can review the Cobb-Douglas function in Chapter 3)Saving, which equals gross
(5.6) Do developments in biotechnology have a better claim than ICT to be a third Industrial Revolution?
(5.6) Consider some of the items you regularly purchase and how they have been affected by ICT. Which sectors/firms have increased their value added share and which have lost out?
(5.6) How have IT developments affected your productivity?
(5.5) Is it better to develop your own technological champions or to rely on foreign direct investment?
(5.4) How would a technological development that boosted output but produced a higher depreciation rate affect output and capital?
(5.4) In this chapter we have assumed that the level of technology can be adjusted independently of the capital stock. However, in practice, investing in new technology means investing in new machines. Use Figure 5.11 to analyze the implications of this.
(5.3) Considering the importance of institutions, what advantages and disadvantages are there to joining the EU for the various ex-Communist economies such as Poland and the Czech Republic?
(5.3) What steps could a government take to remove corruption?
(5.2) Should developing countries spend money on establishing universities in their own countries?
(5.2) Do you think that the marginal product of human capital is decreasing or increasing?Why?
(Section 5.1) Consider an economy well known to you and assess which factors of its TFP are relatively strong compared to other countries and which ones are relatively poor. What steps could be taken to improve TFP?
(4.7) The simple Golden Rule says that the optimal level of capital is one where the marginal product of capital equals the depreciation rate. If people attach less weight to the enjoyment they get from consumption in the future than consumption today, then does it make sense to abide by the Golden
(4.7) Consider the economy of question 3 and compare the steady state level of consumption as you change the investment rate. Show that the Golden Rule result of setting the investment rate equal to a in the production function optimises consumption in the steady state.
(4.6) Use the Cobb-Douglas production function of question 1 where a 0.3 and a depreciation rate of 0.1. Examine the steady state outcomes of an economy that invests 20% and 30% of GDP. How many periods would it take for an economy with a 20% investment rate to reach its new steady state if it
(4.5) The steady state level of consumption in an economy (Css) is equal to steady state output (Yss) minus steady state depreciation. The latter is the depreciation rate (d) times the steady state capital stock (Kss). We assume here that there is no technological progress. Thus What is the impact
(Section 4.1) Use a spreadsheet to consider the following Cobb-Douglas production function where Y TFP L0.7 Ka . The marginal product of capital is given by a Y/K. Setting TFP and L 1, examine the behaviour of the MPK as it varies between 0.3 and 1.
(4.9) In 2002 the U.S. economy measured $10.4 trillion, Japan $4.2 trn, Germany $1.9 trn, and China $1.22 trn. Assuming trend growth of 2.5% in the three OECD nations, how long until China overtakes them if it grows at 5% per annum? 7%? 9%?
(4.8) What can mature industrialized nations learn from the rapid growth of Southeast Asian nations?
(4.3) After World War II, Germany experienced rapid growth in output from relatively little investment. But between 1913 and 1929 its GDP growth was on average 0.1% and showed no such sharp recovery from World War I. What might explain these differences?
(4.2) Using Figure 4.4 show what happens to interest rates, investment, and savings when (a)there is a downward reassessment to the productivity of capital and (b) a demographic shift whereby the proportion of 45–64 year olds increases (an age group with high savings).
(4.1) What technologies might experience increasing marginal product of capital? Do they experience increasing marginal product over all ranges?
(Section 4.1) Consider separately the case of decreasing, constant, and increasing marginal product of capital and where investors can either invest in a bank account and earn interest rate R or invest in the capital stock of a country. Using a diagramatic analysis, examine in each case where
(3.4) Use the production function of Question 4 to calculate(a) What happens to the marginal product of labor if H rises 10% with no change in other inputs?(b) What happens to the marginal product of capital if K increases by 15% with no change in other inputs?(c) What happens to the marginal
(3.4) Output in an economy is produced when labor hours (H) are combined with capital(K) in a way which reflects TFP to produce output (y). The relation is: y TFP. K0.27 H10.27.What is the share of labor income in output? What happens to the share of profits (i.e., capital’s share in output)
(3.4) GDP in an economy is growing at 3% a year in real terms. Population is constant. The government decides to allow a significant increase in immigration so that the population(and the workforce) start to grow by 1% a year. Output is produced in the economy according to a Cobb-Douglas production
Repeat for the marginal product of labor when capital is set to 1 and labor varies between 1 and 10.
Let output be given by TFP K0.3L0.7. Calculate output, the marginal product of capital, and the share of output paid to capital when labor is fixed at 1 and capital varies between 1 and
(Section 3.4) You will need a spreadsheet for this exercise. Assume TFP 1 and set initial capital stock and employment to
(3.4) The Republic of Arden has experienced a 5% increase in output this year, a 2% rise in its capital stock, and a 3% increase in hours worked. Assuming a Cobb-Douglas production function where capital income accounts for 30% of GDP, calculate how much output growth is explained by capital
(3.3) The United States is one of the richest nations in the world and benefits from high levels of TFP. What features of U.S. society do you think can explain this?
(3.3) Figure 3.9 shows that capital stock per worker varies enormously across countries and over time. What factors do you think contribute to these differences?
(3.2) Use Table 3.5 to calculate how much of the variation across countries in GDP per capita is due to differences in hourly productivity, average hours worked, employment, and the participation rate.
If population growth in this country is 2%, then in order to achieve a 2% reduction in poverty it requires a 3% increase in GDP and a 1% increase in GDP per capita. To meet the Millenium Development targets, countries need to achieve an approximate 5% reduction in poverty per annum. Calculate the
(3.1) If a 1% increase in GDP per head reduces poverty by 2%, then the elasticity of poverty with respect to GDP growth is
(3.1) Consider three economies, each of whom has GDP per capita of $100. Trend growth in these economies is 2%, 2.5%, and 5%. Calculate GDP per capita for each economy after 5, 10, 20, 50, and 100 years.
(Section 3.1) Examining Figure 3.1, what factors do you think explain why growth occurs earlier in some regions than others?
(2.6) Use a calculator or, even better, a spreadsheet to plot the relationship between GDP per capita and the HDI index for GDP. What assumptions is this formula making? Do you think these are plausible?
(2.4) The national accounts of Australia for 2002 show (in A$bn):Total consumption $418 billion Investment $158 billion Government spending $125 billion Total exports $151 billion Total imports $156 billion What is GDP? Suppose consumption increases by 10% but output only rises by 5%. Investment
(2.4) A country has overseas assets worth 12% of GDP. Overseas assets earn a return of 7%, which is distributed back to the home country. Other countries own assets in the domestic economy worth 8% of GDP and these assets earn a return of 11%. What is the difference between GDP and GNI?
(2.3) Consider an economy with three productive sectors: mining and farming; manufacturing; and retailing. Manufacturers produce goods each year with a sale value of 500. They sell 400 to retailers and 100 direct to the private sector and to government for consumption. Retailers buy goods for 400
(2.2) Use Table 2.2 to calculate real GDP using constant prices for years 2, 3, and 6. How do your estimates of GDP growth compare with those achieved via chain weighting? What is the direction of the substitution bias?
(Section 2.2) The price of the four sorts of goods produced in an economy in 2000 are:Good A B C D Price 8 9 4 2 Quantity 1000 400 600 1000 The prices of the goods in 2001 are:Good A B C D Price 9 6 8 3 32 CHAPTER 2 The Language of Macroeconomics: The National Income Accounts What is the overall
(2.6) The Beatles claimed that “I don’t care too much for money, money can’t buy me love.”(Shortly after first making this claim they joined the ranks of the richest people in the world.) Does their claim undermine the use of GDP to measure welfare?
(2.5) How would you treat the activities of criminals in GDP accounting? What about the activities of the police force?
(2.5) Do you think it is easier to evaluate the relative welfare of different generations of people in one country (by comparing per capita GDP over time), or to compare the relative standards of living in different countries at a point in time (by converting current per capita GDPs into a common
(2.5) Would you expect that a country where the share of wages and salaries in GDP was falling, and the share of profits and interest was rising, to be one where consumption as a percent of national income was also shifting? Why? Would you expect the distribution of income to become more unequal?
(2.3/2.4) Try to explain to someone who had never thought about measuring the value of economic activity why the output, income, and expenditure ways of measuring national production should give the same answer. It helps to think of a simple economy producing only two or three different things.
(2.3) Coffee beans cost only a few cents when imported. But to buy a coffee at a coffee bar costs far more. What does this tell you about value added?
(Section 2.2) “[An economist] is someone who knows the price of everything and the value of nothing.” (Adapted from George Bernard Shaw.) Discuss.
(1.4) Consider the differing impact of microeconomic and macroeconomic factors in the near term prospects of(a) a graduating student(b) a restaurant in a village(c) a restaurant in an airport(d) a manufacturer of low-price cars(e) a manufacturer of luxury sports cars
(1.3) Figure 1.6 shows the real price of oil since 1913. What other industries besides automobile manufacturers are affected by fluctuations in oil prices, and how are they affected?What are the effects on individual consumers? How do you suppose that national economies of oil-producing nations are
(1.3) Figure 1.5 shows the pattern of bankruptcies and interest rates in the Netherlands.What do you think might account for this pattern? What can firms do to try to minimize this cyclical risk of bankruptcy?
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