L2 - Macroeconomic Data

Question 1

What was the Great Depression?

Answer 1

The aftermath of the Wall Street Crash (stock market crash) of 1929 - longest and most severe depression - lasted 10 years during the 1930s (1929-1939)

Question 2

What was one of the problems during the Great Depression in terms of data?

Answer 2

There was very little data available about the Great Depression which meant that at the time, it was hard to tell how severe the Great Depression was

• no broad based measure of economic activity available
• no way to quantify magnitude of depression
• no way to measure effectiveness of government measures/policies to spur/encourage recovery

Question 3

What did the lack of data problem in the Great Depression lead to?

Answer 3

Simon Kuznets and his colleagues created the National Income and Product Accounts (NIPA) in the 1930s (still used today)

Question 4

What falls under national income accounting?

Answer 4

GDP

Question 5

What is the most important measure of national income accounting created by Simon Kuznets?

Answer 5

GDP

Question 6

What is GDP and why is it an effective measure for the economy?

Answer 6

GDP = total income

Aggregates/totals production of cars, computers, healthcare etc into single measure of economic activity

It is an effective measure because you can compare economic performance across countries and over time

Question 7

Is GDP recorded in the UK?

Answer 7

Yes it is computed quarterly (every 3 months) by the ONS (Office for National Statistics)

Question 8

Define GDP

Answer 8

The market value of the final goods and services produced in an economy over a certain period

Question 9

Briefly explain what calculating GDP involves

Answer 9

Multiplying the market price/value of a good by the quantity produced

Question 10

What are the issues with calculating GDP?

Answer 10

1) it counts only the production of current/new goods not the sale of existing goods

Question 11

In how many ways can you compute GDP?

Answer 11

2 ways to compute GDP

Question 12

What are the ways in which you can compute GDP?

Answer 12

1) calculate the total expenditure on the economy’s output (total value of goods and services purchased in the economy) - expenditure approach
2) calculate the total income of everyone in the economy - income approach

Question 13

How do households and firms interact in an economy?

Answer 13

1) Households provide labour to firms and in return firms provide goods to households
2) Households purchase these goods and their expenditure goes to firms and in return firms pay income/wages to households

Question 14

What does the expenditure approach to calculating GDP involve?

Answer 14

The national income identity equation - this equation breaks down all expenditures into several categories and adds them up to find GDP

The equation:
Y = C + I + G + (X-M)
Y = C + I + G + NX

Above equation written as GDP or income is equal to consumption expenditure + investment expenditure + government expenditure + net exports

Net exports is usually assumed to be 0
Consumption expenditure usually makes up most of GDP

Question 15

How many types of GDP are there what are they?

Answer 15

2 types:
1) Nominal GDP - measures output at current prices - doesn’t take inflation into account … it grows if the quantity produced increases (economic growth) and if prices increase (no economic growth)
2) Real GDP - measures output at constant base year prices - inflation adjusted growth

Question 16

What can you say about how GDP (or more specifically real GDP per capita) grows over time graphically?

Answer 16

It grows exponentially/has an exponential shape

Question 17

State the formula for an exponential growth or an exponentially growing variable Y and state what it means

Answer 17

If variable Y grows exponentially (GDP for example), it can be explained by formula:
Yt = Y0(e^gt)

The formula means that GDP (or a variable Y) with respect to t is equal to the initial GDP multiplied by e to the power of g (which is the growth rate) multiplied by time

Question 18

Given the equation, Yt = Y0(e^gt), how long would it take for Yt to double?

Answer 18

Yt doubles when Yt = 2Y0 (or in words when Yt us equal to 2 times the initial GDP)

We know that Yt = Y0(e^gt)
… Y0(e^gt) = 2Y0

The Y0 cancel each other out so you are left with:
e^gt = 2

If you ln both sides you get:
ln(e^gt) = ln(2)

lne cancel each other out and so you are left with:
gt = ln2)

… t = ln(2) / g

If we were given a value for growth rate, g, then we could calculate an actual value for time, t.

Question 19

How long does it roughly take for real GDP per capita in the US to double?

Answer 19

Real GDP per capita in the US (and the U.K) grows at a rate of approximately 2% hence it approximately doubles in 35 years

… the estimate provided by the rule of 70 would be quite accurate as 70/2 = 35

(Remember rule of 70 = 70 / growth rate as an integer)

Question 20

What’s another way you can measure long term GDP growth?

Answer 20

Using the log - scale

Consider exponential equation: Yt = Y0(e^gt)

First take ln on both sides so that you get:
ln(Yt) = ln(Y0) + ln(e^gt)

As ln(e) cancel out, this becomes:
ln(Yt) = ln(Y0) + gt

The log/ln scale assumes a constant growth rate which can be seen by the equation above which now has the form of a straight line where ln(Yt) is your y-axis, ln(Y0) is your y-intercept, t is your x-axis and g is your constant gradient (hence a straight line)

Question 21

What can you say about long and short run real GDP per capita growth?

Answer 21

Long run - in the UK and US, real GDP per capita grows at an approximately constant rate of 2% in the long run

Short run - in the business cycle there are both booms or recessions where growth can either exceed or fall below this 2% rate (the long run trend)

Overall growth continues to occur at the 2% rate in the long run despite fluctuations from this growth due to the business cycle in the short run

Question 22

What is the most commonly used measure of the level of prices how does it work?

Answer 22

The consumer price index (CPI)

It works by computing a weighted average of the prices of a basket of goods and services purchased by a typical consumer

The consumer price index is the price of this basket relative to the price of the same basket in some base year (so you compare the change in price which is used to calculate inflation)

Question 23

How does inflation compare between the US and the UK?

Answer 23

Mostly very similar but the UK’s inflation peaked much higher in the mid 1970s and in 1980

Question 24

How does inflation compare across the world (specifically the developed world - US, UK, Euro Zone, Japan, China)?

Answer 24

Again similar trends but obviously differences as well

One thing to point out is that only the UK and US didn’t dip into negative inflation out of the countries and areas mentioned in the question - the rest did during the COVID pandemic

Question 25

State the important employment equations

Answer 25

1) Adult population = labour force + not in the labour
2) Labour force = employed + unemployed
3) Unemployment rate = (unemployed / labour force)100
4) Labour force participation rate = (labour force / adult population)100

Question 26

Which category do students fall in terms of employment?

Answer 26

We fall under the ‘not in labour force’ category as to be unemployed we need to be actively searching for a job which as students we are not

Question 27

How does the unemployment rate compare between the UK and US?

Answer 27

Again mainly the same with varying peaks and falls at different times

Question 28

What are ways in which you can show the difference between the actual log GDP (including the business cycle variations) over time and its long-run trend (2% growth rate) - separate date into long run trend and the cyclical variations?

Answer 28

1) Linear detrending (removing differences from regression line)
2) Looking at growth rates (first-differencing) - basically measuring the changes in a time series from 1 period to the next
3) HP (Hodrick-Prescott) filter (minimising deviation of original series from trend)

Basically these are all different ways to do the same thing but obviously each method varies slightly - in the slides the second 2 methods are considered better than the first, linear detrending