This exam consists of THREE sections. Answer ALL questions in Section A, ONE from Section B, and ONE from Section C (on reverse side).
Instructions:
Answer ALL questions. Each question is worth 3 marks.
Notes: - If definition is short and succinct and resembles the concept in question, 3 marks. - If definition long winded, hard to follow, but does vaguely resemble the concept in question, 2 marks. - If definition is short but doesn’t really resemble the concept in the question, 1 mark. - If definition doesn’t resemble the concept in the question at all, no marks.
Provide a definition of the following concepts:
From Google: - the state of being unemployed. - the number or proportion of unemployed people. - unemployed: (of a person) to be willing to work but not in a paid job.
From Google: - the effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input.
From Google: - The natural rate of unemployment is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.
From Google: - difference in size, degree, circumstances, etc.; lack of equality.
Students should define capital as in capital goods: - goods that are used in producing other goods, rather than being bought by consumers.
But give credit (up to 2 marks) if students define well capital as a monetary concept: - wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing.
Again, capital formation is the desired concept given the course content thus far: - net additions of capital stock such as equipment, buildings and other intermediate goods.
But equally, give credit (up to 2 marks) a good definition of a more general investment, e.g.: - the action or process of investing money for profit.
From Google: - a reduction in the value of an asset over time, due in particular to wear and tear.
From Google: - the portion of output not explained by the amount of inputs used in production.
Notes
I gave the students the following “markscheme” yesterday:
I’ll put some specific notes for each question now, below…
Answer one question.
Notes Looking for another basic definition (or happy if student reference their earlier definition of GDP/GNP once they’ve linked that to national income), and then basic description of the three ways to measure it. Ideally they’ll hold off critiquing the measures until (b) or (c).
Notes Similar to my answer written out; yes if we accept markets perfectly competitive and hence welfare theorems hold. But in real world they don’t, and in fact GDP measures a lot of things we might think negative, and fails to measure a number of other things well (e.g. black market, public sector services) meaning that more than likely it doesn’t equate well to welfare.
Notes Again similar to written answer — to what extent is one needed when we already have other measures that get around the major issues surrounding GDP’s inapplicability — e.g. population (per capita), inequality (look at distribution, 80/20 measure Joe Grice presented in his lecture), net national income (for depreciation). Nonetheless these do not rule out production of “negatives” such as healthcare for stress-related issues.
Notes TFP is output not caused by labour or capital inputs, at its simplest — hence represents factors such as institutions, organisational arrangements and practices, and human capital (if we consider labour in its simplest form as units of identical labour services). It affects economic growth in the sense that it explains economic growth that we cannot directly associate with labour or capital inputs, but in the sense it is quite a vacuous concept, it is hard to see how it really affects growth.
Notes From core lecture 2, slides 23–24, https://rpubs.com/jjreade/corelec2, hence:
Plausibility? We found in lectures that not many countries appear to follow it, hence empirical validity seems lacking, and additionally it is based on some very basic assumptions, such as that investment is a fixed proportion of output.
c. "Growth always leads to more inequality; do we really want more growth then?" Do you agree with this statement? [10]
**Notes** This refers back to core lecture 1, slides 47--50, <https://rpubs.com/jjreade/corelec1>, which points out that growth can coincide with all sorts of patterns in inequality, and that empirically it has done also. As such, the response to the first part of the quote must be that it's not true, and hence the second part of the statement then doesn't follow --- or at least, it should be qualified to whether we want growth that leads to more inequality. Better answers will naturally examine the statement in depth, thinking about the value of inequality.Notes Unemployment refers to people who are out of work despite being willing to work. We measure it in two ways. (I suspect few if any will have answered this as we didn’t really cover unemployment measurement in the lectures too much). We measure it first via the claimant count, summing up all people claiming benefits, and second via the ILO’s Labour Force Survey, which examines a sample of the workforce and determines the level of unemployment from that. If students are a little vague on measurement, I’m happy for some generosity to be applied given that on reflection this question is a little inappropriate.
Notes Students should be much clearer here, discussing one of the two approaches to determining this level considered in the lecture (https://rpubs.com/jjreade/corelec3). Naturally, better answers will take seriously the assumptions made, not simply dismissing them for being “too simplistic”.
Notes Not really covered in lectures, hence an extension to test the better students. What would be the implication of a government targetting unemployment? It was mentioned in one of the lectures that if employment is targetted that it’s better for there to be two people doing 20 hours per week than one doing 40, and hence any targets adopted can lead to perverse incentives. With unemployment we get government incentives to move people off unemployment benefits to incapacity benefits, but alternatively there may be job-creation schemes that create jobs if unemployment is targetted. Good to mention how multiple targets can conflict with each other, which has highest weight, and why?
Notes Some students will have misinterpreted my instructions on the paper, and only answered (a) or (b) or (c). If this is clearly the case, then apply their mark for that single part to the whole question, since my instructions were not clear enough.
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.