Instructions

Section A

Answer ALL questions. Each question is worth 3 marks.

Provide a definition of the following concepts:

  1. Inflation: “a general increase in prices and fall in the purchasing value of money.”
  2. Income: “money received, especially on a regular basis, for work or through investments.”
  3. Output: “he amount of something produced by a person, machine, or industry.”
  4. Productivity: “the effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input.”
  5. Unemployment: “the state of being unemployed.”
  6. Savings: “the portion of disposable income not spent on consumption of consumer goods.”
  7. Investment: “the action or process of investing money for profit.”
  8. Consumption: “the action of using up a resource.”
  9. The multiplier: “the ratio in which the change in a nation’s income level is affected by government spending.”
  10. Terms of trade: “the ratio of an index of a country’s export prices to an index of its import prices.”

Notes:

Section B

Initial Note on exam questions: I set all exam essay questions in three parts, for the purpose of helping me (or whoever marks the exam) to determine the right mark for the student sitting the exam. The first part, (a), is definitional, and involves the basics of any subject being covered. You should make sure you can answer part (a) questions as these are essential for a pass. Part (b) questions are designed to span the range between getting a pass, and getting a first class mark, in that they delve deeper into that particular topic, and ask for some analysis. Part (c) questions are aimed at stretching the better students in order that I can get a sense of who are the students deserving of the top marks, and as such they will look quite difficult, often thinking about a topic in a much broader context, or in some particular applied situation (e.g. the forthcoming general election). If you feel you are not a top student, do not feel panicked when looking at part (c) questions; make sure you can answer parts (a) and (b).

Answer one question.

  1. National income and accounts:
    1. What is national income and how is it measured? [15]
    2. What are the problems with GDP measurement? [10]
    3. Does, and should, GDP measure wellbeing? [10]
  2. Growth and Total Factor Productivity:
    1. What is total factor productivity (TFP) and how does it affect economic growth? [15]
    2. What is the Golden Rule, and does it seem plausible? [10]
    3. “TFP is just a residual and hence should be ignored.” Do you agree with this statement? [10]
  3. Unemployment:
    1. What is unemployment, and how do we measure it? [15]
    2. Describe how effective government policy can be at influencing unemployment. [10]
    3. Should governments explicitly target the unemployment rate? [10]

Notes: All of these questions are directly taken from the lectures, which are based on the textbook. For example, 11(a) looks for a definition of national income, and a description of the ways it is measured (i.e. income, expenditure and output methods), with an appreciation of (a) how these approaches work, and (b) how effective they are.

Section C

  1. Theory and reality:
    1. Define an economic fact, and an economic theory. How are the two related? [15]
    2. What constitutes a useful economic model? Can you give an example? [10]
    3. “The world must abandon obsolete economic theories”. Does this seem like good advice? [10]

Notes: This section is put here deliberately to ensure focus on what we do as macroeconomists, and economists more generally.

Hence for (a), the simple answer is to (1) define what an economic fact is, then (2) define what an economic theory is, before linking the two together. An economic fact is a fact related to the economy, and a fact is defined to be “a thing that is known or proved to be true.” As in, it’s an economic event (a recession, an increase in interest rates, a general election). An economic theory is a theory related to the economy; a theory is “a supposition or a system of ideas intended to explain something.” Hence, it’s a set of ideas to explain something — a fact, or set of facts. Hence the two are linked.

The bigger point here is that we observe economic facts, and we propose economic theories to explain those economic facts. We do not know whether our theory is right because we only observe how the world turns out — economics is an observational science.

The deeper point about whether a model is any good, that is what parts (b) and (c) are aimed at addressing — when you’re answering an essay question that has multiple sub-parts like this, make sure you answer each subpart clearly.

So, on (b), you should refer to the discussion around slides 14–16 in Applications Lecture 1 (https://rpubs.com/jjreade/applec1). A useful model serves the purpose intended for it. In the example, the purpose is to help travellers get between two geographical points. In economics, it is to help us understand why economic facts might be connected, and the direction of causality between those events. You might wish to listen to the audio from that lecture on this point: https://www.dropbox.com/s/keg0w00l0b2wzr2/data-2015-1-15-14-02-32.3gp?dl=0

On (c), the question is whether bad theories should be abandoned. In principle, if a theory is clearly bad, then it should not be relied upon for serious inference, such as that needed for policy advice.  Specifically though, the issue is that of whether a theory can be determined to be bad — which involves some deeper understanding of the mechanisms determining economic events than we necessarily have. Nonetheless, the point is: economic theories are developed to explain economic facts, and as such if we feel that an economic theory cannot explain an economic fact (e.g. intra-industry trade and Hescksher-Ohlin), then that suggests a theory might not be particularly useful. Nonetheless, if that theory still explains other facts (as HO does), then we might determine it is still of use.

The fundamental issue is that of making mistakes. If we make a mistake in rejecting a theory, what are the consequences? Potentially a misguided understanding of how economic events are occurring, and misguided economic policy by governments. On the other hand, another mistake is to accept a theory when in reality it is bad, and again the same outcome may occur — bad policy.