### Problem Session-2

```ISL244E
Macroeconomics
Problem Session-12
by
Research Assistant
Serkan Değirmenci
02.05.2012
Today
• BLANCHARD (2009), Macroeconomics
- Chapter 10: The Facts of Growth:
(btw pages: 227-243)
 Quick Check (QC): (1-3) (Page: 242)
- Chapter 11: Saving, Capital Accumulation, and Output:
(btw pages: 245-267)
 Quick Check (QC): (1-3) (Page: 265)
 Dig Deeper (DP): (4-6) (Page: 265-266)
Chapter 10-QC-1 (Page: 242)
Using the information in this chapter, label each of the following statements
True, false, or uncertain. Explain briefly.
a. On a logarithmic scale, a variable that increases at 5% per year will move
along an upward-sloping line with a slope of 0.05. TRUE (SEE PAGE 228-FIGURE 10-1)
b. The price of food is higher in poor countries than it is in rich countries. FALSE (229)
c. Evidence suggests that happiness in rich countries increases with output
per person. FALSE (SEE PAGE 231=>SEE FOCUS BOX: “Growth and Happiness”)
d. In virtually all the countries of the world, output per person is converging
to the level of output per person in the United States. FALSE (SEE PAGE 236)
e. For about 1,000 years after the fall of the Roman Empire, there was
essentially no growth in output per person in Europe, because any increase in
output led to a proportional increase in population. TRUE (SEE PAGE 235)
f. Capital accumulation does not affect the level of output in the long-run;
Only technological progress does. FALSE (SEE PAGE 240)
g. The aggregate production function is a relation between output on one
hand and labor and capital on the other. TRUE (SEE PAGE 237) => Y = F (K, N)
Chapter 10-QC-2 (Page: 242)
Assume that the average consumer in Mexico and the average consumer in
the United States buy the quantities and pay the prices indicated in the
following table:
Food
Mexico
United States
Transportation Services
Price
Quantity
Price
Quantity
10 pesos
800
30 pesos
300
\$2
2,000
\$3
3,000
a. Compute U.S. consumption per capita in dollars.
b. Compute Mexican consumption per capita in pesos.
c. Suppose that 1 dollar is worth 10 pesos. Compute Mexico’s consumption
per capita in dollars.
d. Using the purchasing power parity method and U.S. prices, compute
Mexican consumption per capita in dollars.
e. Under each method, how much lower is the standard of living in Mexico
than in the United States? Does the choice of method make a difference?
Chapter 10-QC-2 (Page: 242)
SOLUTION: (SEE PAGES: 228-229)
The table should read as follows.
Food
Mexico
United States
a.
b.
c.
d.
e.
Transportation Services
Price
Quantity
Price
Quantity
10 pesos
800
30 pesos
300
\$2
2,000
\$3
3,000
U.S. consumption per person = \$2(2000) + \$3(3,000)=\$13000
Mexican consumption per person=10(800) pesos + 30(300) pesos =
17000 pesos
From the U.S. point of view, the exchange rate (E)=10 pesos/\$.
Mexican consumption per person in dollars = 17000 pesos/E=\$1700
Mexican consumption per person (\$PPP)=\$2(800)+\$3(300)=\$2500
Mexican standard of living relative to the United States
Exchange rate method: 1700/13000 =0.13
PPP method: 2500/13000=0.19
Chapter 10-QC-3 (Page: 242)
Consider the production function Y  K N.
a. Compute output when K=49 and N=81.
b. If both capital and labor double, what happens to output?
c. Is this production function characterized by constant returns to scale?
Explain.
d. Write this production function as a relation between output per worker
and capital per worker.
e. Let K/N=4. What is Y/N? Now double K/N to 8. Does Y/N double as a
result?
f. Does the relation between output per worker and capital per worker
exhibit constant returns to scale?
g. Is your answer in (f) the same as your answer in (c)? Why or why not?
h. Plot the relation between output per worker and capital per worker. Does
it have the same general shape as the relation in Figure 10-4? Explain.
Chapter 10-QC-3 (Page: 242)
SOLUTION:
a. Y=63
b. Y doubles.
c. Yes.
d. Y/N=(K/N)1/2
e. K/N=4 implies Y/N=2. K/N=8 implies Y/N=2.83. Output
less than doubles.
f. No.
g. No. In part (f), we are essentially looking at what
happens to output when we increase capital only, not capital
and labor in equal proportion. There are decreasing returns
to capital.
h. Yes. SEE PAGE 239-FIGURE 10-4
OUTPUT AND CAPITAL PER WORKER: (SEE PAGE 239-FIGURE 10-4)
INCREASES IN CAPITAL PER WORKER LEAD TO SMALLER AND SMALLER INCREASES IN
OUTPUT PER WORKER.
to be continued…
```