Macro Economics Question

College of Administrative and Financial Sciences
Assignment-2
Deadline: 25/03/2021 @ 23:59
Course Name: Macroeconomics
Student’s Name:
Course Code: ECON201
Student’s ID Number:
Semester: II
CRN:
Academic Year: 1441/1442 H
For Instructor’s Use only
Instructor’s Name: Hajar AlEisa
Students’ Grade:
/ 5
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
•
The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
•
Assignments submitted through email will not be accepted.
•
Students are advised to make their work clear and well presented, marks may be reduced for
poor presentation. This includes filling your information on the cover page.
•
Students must mention question number clearly in their answer.
•
Late submission will NOT be accepted.
•
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
•
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
•
Submissions without this cover page will NOT be accepted.
Assignment 2 Question-Chapters: 12, 13, 14 & 15: – [2.5 Marks]
Q1: Saudi Arabia’s Ministry of Human Resources recently announced an increase to the monthly
minimum wage from 3000 SAR to 4000 SAR for full-time Saudi workers in April 2021, and
introduced a Labor Reform Initiative (LRI) scheduled to take effect on 14th March 2021.
a. Discuss the implications of the above topic.
b. Will this impact unemployment in the country? How?
Q2: Three students have each saved $1,000. Each has an investment opportunity in which he or
she can invest up to $2,000. Here are the rates of return on the students’ investment projects:
[2.5 Marks]
Harry 5 percent
Ron 8 percent
Hermione 20 percent
a. If borrowing and lending is prohibited, so each student uses only his or her saving to
finance his or her own investment project, how much will each student have a year later when
the project pays its return?
b. Now suppose their school opens up a market for loanable funds in which students can
borrow and lend among themselves at an interest rate r. What would determine whether a
student would choose to be a borrower or lender in this market?
c. Among these three students, what would be the quantity of loanable funds supplied and
quantity demanded at an interest rate of 7 percent? At 10 percent?
d. At what interest rate would the loanable funds market among these three students be in
equilibrium? At this interest rate, which student(s) would borrow, and which student(s) would
lend?
e. At the equilibrium interest rate, how much does each student have a year later after the
investment projects pay their return and loans have been repaid? Compare your answers to
those you gave in part (a). Who benefits from the existence of the loanable funds market—the
borrowers or the lenders? Is anyone worse off?
Answer:
N. Gregory Mankiw
Principles of
Macroeconomics
Sixth Edition
12
Production and Growth
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Premium
PowerPoint
Slides by
Ron Cronovich
In this chapter,
look for the answers to these questions:
• What are the facts about living standards and
growth rates around the world?
• Why does productivity matter for living
standards?
• What determines productivity and its growth
rate?
• How can public policy affect growth and living
standards?
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A typical family with all their possessions in
the U.K., an advanced economy
GDP per capita:
Life expectancy:
Adult literacy:
$36,130
80 years
99%
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A typical family with all their possessions in
Mexico, a middle income country
GDP per capita:
Life expectancy:
Adult literacy:
$14,270
76 years
86%
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A typical family with all their possessions in
Mali, a poor country
GDP per capita:
Life expectancy:
Adult literacy:
$1,090
52 years
46%
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Incomes
and Growth
Around the
World
FACT 1:
There are
vast
differences
in living
standards
around the
world.
GDP per
Growth rate,
capita, 2009 1970–2009
China
Singapore
India
Japan
Spain
Israel
Colombia
United States
Canada
Philippines
Rwanda
New Zealand
Argentina
Saudi Arabia
Chad
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
$6,828
$50,633
$3,296
$32,418
$32,150
$27,656
$8,959
$45,989
$37,808
$3,542
$1,136
$28,993
$14,538
$23,480
$1,300
7.4%
4.7%
3.3%
2.2%
2.1%
2.1%
1.9%
1.8%
1.7%
1.3%
1.1%
1.1%
1.0%
0.6%
0.4%
Incomes
and Growth
Around the
World
FACT 2:
There is
also great
variation
in growth
rates across
countries.
GDP per
Growth rate,
capita, 2009 1970–2009
China
Singapore
India
Japan
Spain
Israel
Colombia
United States
Canada
Philippines
Rwanda
New Zealand
Argentina
Saudi Arabia
Chad
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
$6,828
$50,633
$3,296
$32,418
$32,150
$27,656
$8,959
$45,989
$37,808
$3,542
$1,136
$28,993
$14,538
$23,480
$1,300
7.4%
4.7%
3.3%
2.2%
2.1%
2.1%
1.9%
1.8%
1.7%
1.3%
1.1%
1.1%
1.0%
0.6%
0.4%
Incomes and Growth Around the World
Since growth rates vary, the country rankings can
change over time:
▪ Poor countries are not necessarily doomed to
poverty forever, e.g. Singapore incomes were
low in 1960 and are quite high now.
▪ Rich countries can’t take their status for
granted: They may be overtaken by poorer but
faster-growing countries.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Incomes and Growth Around the World
Questions:
▪ Why are some countries richer than others?
▪ Why do some countries grow quickly while
others seem stuck in a poverty trap?
▪ What policies may help raise growth rates and
long-run living standards?
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Productivity
▪ Recall one of the Ten Principles from Chap. 1:
A country’s standard of living depends
on its ability to produce g&s.
▪ This ability depends on productivity,
the average quantity of g&s produced
per unit of labor input.
▪ Y = real GDP = quantity of output produced
L = quantity of labor
so productivity = Y/L (output per worker)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Why Productivity Is So Important
▪ When a nation’s workers are very productive,
real GDP is large and incomes are high.
▪ When productivity grows rapidly, so do living
standards.
▪ What, then, determines productivity and its
growth rate?
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Physical Capital Per Worker
▪ Recall: The stock of equipment and structures
used to produce g&s is called [physical] capital,
denoted K.
▪ K/L = capital per worker.
▪ Productivity is higher when the average worker
has more capital (machines, equipment, etc.).
▪ i.e.,
an increase in K/L causes an increase in Y/L.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Human Capital Per Worker
▪ Human capital (H):
the knowledge and skills workers acquire
through education, training, and experience
▪ H/L = the average worker’s human capital
▪ Productivity is higher when the average worker
has more human capital (education, skills, etc.).
▪ i.e.,
an increase in H/L causes an increase in Y/L.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Natural Resources Per Worker
▪ Natural resources (N): the inputs into production
that nature provides, e.g., land, mineral deposits
▪ Other things equal,
more N allows a country to produce more Y.
In per-worker terms,
an increase in N/L causes an increase in Y/L.
▪ Some countries are rich because they have
abundant natural resources
(e.g., Saudi Arabia has lots of oil).
▪ But countries need not have much N to be rich
(e.g., Japan imports the N it needs).
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Technological Knowledge
▪ Technological knowledge: society’s
understanding of the best ways to produce g&s
▪ Technological progress does not only mean
a faster computer, a higher-definition TV,
or a smaller cell phone.
▪ It means any advance in knowledge that boosts
productivity (allows society to get more output
from its resources).
▪ e.g., Henry Ford and the assembly line.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tech. Knowledge vs. Human Capital
▪ Technological knowledge refers to society’s
understanding of how to produce g&s.
▪ Human capital results from the effort people
expend to acquire this knowledge.
▪ Both are important for productivity.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Production Function
▪ The production function is a graph or equation
showing the relation between output and inputs:
Y = A F(L, K, H, N)
F( ) is a function that shows how inputs are
combined to produce output
“A” is the level of technology
▪ “A” multiplies the function F( ),
so improvements in technology (increases in “A”)
allow more output (Y) to be produced from any
given combination of inputs.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Production Function
Y = A F(L, K, H, N)
▪ The production function has the property
constant returns to scale: Changing all inputs
by the same percentage causes output to change
by that percentage. For example,
▪ Doubling all inputs (multiplying each by 2)
causes output to double:
2Y = A F(2L, 2K, 2H, 2N)
▪ Increasing all inputs 10% (multiplying each by 1.1)
causes output to increase by 10%:
1.1Y = A F(1.1L, 1.1K, 1.1H, 1.1N)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Production Function
Y = A F(L, K, H, N)
▪ If we multiply each input by 1/L, then
output is multiplied by 1/L:
Y/L = A F(1, K/L, H/L, N/L)
▪ This equation shows that productivity
(output per worker) depends on:
▪ the level of technology (A)
▪ physical capital per worker
▪ human capital per worker
▪ natural resources per worker
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ACTIVE LEARNING
1
Discussion Question
Which of the following policies do you think would
be most effective at boosting growth and living
standards in a poor country over the long run?
a. Offer tax incentives for investment by local firms
b. ”
”
”
”
”
by foreign firms
c. Give cash payments for good school attendance
d. Crack down on govt corruption
e. Restrict imports to protect domestic industries
f. Allow free trade
g. Give away condoms
© 2012 ©
Cengage
2012 Cengage
Learning.
Learning.
All Rights
AllReserved.
Rights Reserved.
May notMay
be copied,
not be copied,
scanned,scanned,
or duplicated,
or duplicated,
in wholeinorwhole
in part,
or in
except
part,for
except
use as
for use as
permitted
permitted
in a license
in a distributed
license distributed
with a certain
with a product
certain product
or service
or or
service
otherwise
or otherwise
on a password-protected
on a password-protected
website website
for classroom
for classroom
use.
use.
ECONOMIC GROWTH
AND PUBLIC POLICY
Next, we look at the ways
public policy can affect
long-run growth in productivity
and living standards.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Saving and Investment
▪ We can boost productivity by increasing K,
which requires investment.
▪ Since resources scarce, producing more capital
requires producing fewer consumption goods.
▪ Reducing consumption = increasing saving.
This extra saving funds the production of
investment goods.
(More details in the next chapter.)
▪ Hence, a tradeoff between current and future
consumption.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Diminishing Returns and the Catch-Up
Effect
▪ The govt can implement policies that raise
saving and investment. (Details in next chapter.)
Then K will rise, causing productivity and living
standards to rise.
▪ But this faster growth is temporary,
due to diminishing returns to capital:
As K rises, the extra output from an additional
unit of K falls….
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Production Function & Diminishing Returns
If workers
Output per
have little
K,
worker
giving
them more
(productivity)
increases their
productivity a lot.
Y/L
If workers already
have a lot of K,
giving them more
increases
productivity
fairly little.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
K/L
Capital per worker
The catch-up effect: the property whereby poor
countries tend to grow more rapidly than rich ones
Y/L
Rich country’s
growth
Poor country’s
growth
K/L
Poor country
starts here
Rich country starts here
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Example of the Catch-Up Effect
▪ Over 1960–1990, the U.S. and S. Korea devoted
a similar share of GDP to investment, so you
might expect they would have similar growth
performance.
▪ But growth was >6% in Korea and only 2% in
the U.S.
▪ Explanation: the catch-up effect.
In 1960, K/L was far smaller in Korea than
in the U.S., hence Korea grew faster.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Investment from Abroad
▪ To raise K/L and hence productivity, wages, and
living standards, the govt can also encourage
▪ foreign direct investment:
a capital investment (e.g., a factory) that is
owned & operated by a foreign entity
▪ foreign portfolio investment:
a capital investment financed with foreign
money but operated by domestic residents
▪ Some of the returns from these investments
flow back to the foreign countries that supplied
the funds.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Investment from Abroad
▪ Especially beneficial in poor countries that cannot
generate enough saving to fund investment
projects themselves.
▪ Also helps poor countries learn state-of-the-art
technologies developed in other countries.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Education
▪ Govt can increase productivity by promoting
education–investment in human capital (H).
▪ Public schools, subsidized loans for college
▪ Education has significant effects: In the U.S.,
each year of schooling raises a worker’s wage
by 10%.
▪ But investing in H also involves a tradeoff
between the present & future:
Spending a year in s…
Purchase answer to see full
attachment