Review Questions for Data of Macroeconomics

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Here is a summary of where we are so far. Most of the summary is in the form of questions. If, after revising the material, you can answer all these questions without much though, AND you can do the problems in set 1, you should feel confident that you have mastered the material.

I recommend you take time to prepare answers to these questions before we move on to the next section -- they would make useful summary notes in your own words for later revision. In a few weeks, pull the questions out again and see if you can still answer them all easily without looking at your notes. Following these suggestions will also make your life more exciting and fulfilling.

We looked at 3 pieces of information: gross national product, inflation and unemployment. For each of these, we asked the following questions:

a) What would we like it to measure?      b) How is it actually measured?      c) How has the variable behaved over time?

Overall, we find that the official statistics don't measure exactly what we care about (or exactly what our economic theories may be about), and even what they set out to measure is done with error. Despite these inadequacies, however, the data remain extremely useful.

You should be able to answer the following questions (links are given to brief answers to get you started- these are not always complete):

a) GDP  (i) What is the difference between GDP and GNP? For what types of countries is the difference likely to be important (you might even want to look up some official data to see how big the differences can be some countries)? (ii) What are the three ways by which GDP can be calculated? What are the main components of GDP? (iii) What is the logic of including residential house purchases in investment rather than consumption? (iv) What is the distinction between real and nominal GDP? (v) Why is accuracy in measuring inflation important for an understanding of how well national production is doing? (vi) What important items are missing from GDP? (vii) How does omitting household production from GDP make poor countries look even poorer than they are? (viii) Explain the effects that a natural disaster, such as a hurricane, will have on GDP.

b) Inflation  (i) What did the Boskin Commission do? (ii) We looked at two important ways in which the consumer price index overstates inflation -- substitution bias and quality change bias. How do these problems affect the way that inflation is calculated? (iii) Why might adjusting for quality change bias be good for the Federal budget? (iv) What are the effects of anticipated and unanticipated inflation? (v) How do inflation and deflation distribute risk between different groups of people? You should be able to explain this with reference to the examples of the 1896 Presidential debate and to the recent and ongoing deflation in Japan. (vi) What does it mean to be on a gold standard? When currencies are on a gold standard, why are discoveries of gold more likely after a period of deflation?

c) Unemployment  (i) How is the method used to collect unemployment data misleading about unemployment? (ii) How is the official definition of unemployment misleading about unemployment? (iii) In models we develop later in the class we will EITHER talk about the effects of policies on GDP OR the effect of policies on unemployment. Use Okun's Law to explain why we can ignore one of these two variables in our models?

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Some Additional Questions

Links go to answers or hints. Although it is very tempting to do otherwise, you should make a serious attempt to answer a question before following the link. You will learn a lot about your mastery of the material by comparing your answer with mine.

1. Why does the official unemployment rate understate the real unemployment rate? Provide two reasons.

2. Suppose that on January 1 1999, the government creates a million new jobs. Only those currently without work may apply. The new jobs attract 3 million applicants, half of whom would not otherwise be looking for work in January. Does official unemployment go up or down? By how much?

3. In 1990, GNP in the United States was only 1% greater than GDP. In the United Arab Emirates, the difference was much larger: GNP was about 12% greater than GDP. What might explain the difference? (See this entry).

4. Why might a country concerned about inflation like to appoint a wealthy person as the head of its central bank? (See this entry).

5. True or False: Because of substitution bias, we tend to overstate the average inflation rate during periods of rising prices. By a symmetrical argument, it follows that we tend to understate the average inflation rate during periods of falling prices. Explain.

6. Utopia produces only two goods: Coke and oil. In 2001 production reached 200 cans of Coke and 170 barrels of oil, with prices equal to 1 and 2 dollars respectively. The forecast for next year is 300 cans of coke and 130 barrels of oil with an estimated price of 0.5 and 3 dollars respectively. Last, but not least, in order to produce 10 cans of coke one needs 1 barrel of oil.   a) What is the expected percentage change in nominal GDP?   b) What is the expected percentage change in real GDP?   c) What is the expected inflation rate?

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