Please write your answers on this exam paper.
Name________________
Student ID ________________
Economics 2000
Final Exam
December 21, 2012
Write all answers on this exam paper. Do not turn in the beige exam books. 50 points total.
Multiple Choice (1/2 point each)
1. If a country’s exchange rate is overvalued (relative to PPP)
a.
Its cost of living is relatively expensive and its exchange rate is greater than its
PPP conversion factor.
b. Its cost of living is relatively expensive and its exchange rate is lower than its PPP
conversion factor.
c. Its cost of living is relatively cheap and its exchange rate is greater than its PPP
conversion factor.
d. Its cost of living is relatively cheap and its exchange rate is lower than its PPP
conversion factor.
______B _______
2. Which of the following is not one of the key principals of a good taxation scheme
a.
b.
c.
d.
Diagonal Equity
Vertical Equity
Horizontal Equity
All are key principals.
______A______
3. “Green GDP “ is
a.
b.
c.
d.
GDP plus environmental degradation costs
GDP minus environmental degradation costs.
GDP plus extraction of sub-soil assets
GDP minus extraction of sub-soil assets
______B______
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4. Review the following table for Thailand. Using this data, we can estimate that
Thailand
Income share held by highest 20%
Income share held by fourth 20%
Income share held by third 20%
Income share held by second 20%
Income share held by lowest 20%
2004
49.3
20.7
14.1
9.73
6.18
a. The GINI coefficient is above 100 and median income per capita is less than half
of average income per capita.
b. The GINI coefficient is above 100 and median income per capita is more than half
of average income per capita.
c. The GINI coefficient is below 100 and median income per capita is less than half
of average income per capita.
d. The GINI coefficient is below 100 and median income per capita is more than
half of average income per capita.
________D____
5. Consider the country of Japan which has experienced a long period of deflation. We can
say that on average if the Fisher effect applies:
a. the inflation adjusted interest rate, r, is higher than the nominal interest rate i; and, the
value growth rate 1  gV is larger than the volume growth rate 1  g Q .
b. the inflation adjusted interest rate, r, is higher than the nominal interest rate i; and, the
value growth rate 1  gV is smaller than the volume growth rate 1  g Q .
c. the inflation adjusted interest rate, r, is lower than the nominal interest rate i; and, the
value growth rate 1  gV is larger than the volume growth rate 1  g Q .
d. the inflation adjusted interest rate, r, is lower than the nominal interest rate i; and, the
value growth rate 1  gV is smaller than the volume growth rate 1  g Q .
_______B_____
6. Which of the following is not a key element of the “Washington Consensus” program
a. Trade Liberalization
b. Liberalization of Inward Foreign Direct Investment.
c. Import Substitution
d. Easing barriers to entry and exit.
___C_________
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Short Answer
7. (2 points) Name one advantage and one disadvantage for the business group corporate
model.
Advantage
Economies of Scope: Bargaining power with suppliers, marketing muscle,
information sharing, use management skill.
Diversify Risk and Increase Access to Capital
Disadvantages
Insiders may use corporate assets to server group at expense.
May use connections with gov’t to eliminate competition.
8. (2 points) How can government aid development according to New Structuralist
Development Strategy?
New Structuralist Development theory suggests giving government support to pioneer
firms in new advanced industries which provide information to other firms.
9. (2 points) What is Bagehot’s Law? When might it be applied?
Bagehot prescribed free lending at penalty rates againsts good collateral during a banking
crisis.
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Computational
10. (2 points) Use the data in the following table from Brazil’s current price national
accounts to measure the contribution of Consumption to GDP volume growth in 2009.
The increase in prices for sector k = Consumption is
k
P2009
k
P2008
= 1.05
Value
Consumption GDP
2008
2400
3000
2009
2610
3017
2610
 2400
1.05
Contribution is
 .0285
3000
11. (2 points) The World Comparison Project breaks purchases in Thailand down into two
categories, k = 1 and 2. They report expenditures and relative prices (baht relative to
USA $) for each category. Construct the PPP for Thailand.
Good
k
Expenditures
(Trillion Baht)
1
2
v1  v2
v1
v
 2
P1k
P1US

P2k
24

16  8
24
36
k
k
pThai
pUS
$
16
8
24
24 3

  27
32
24  8
1
36
36
36
9
P2US
4
24
36
Please write your answers on this exam paper.
12. (2 points) The growth rate of volume GDP is always 4% per year. The investment to
output ratio is always 25%. Calculate ICOR.
ICOR = .25/.04 = 6.25
13. (4 points) The IMF predicts a long-term growth rate of current price GDP for the
European country of Portugal to be 2.5%. Use the following table to estimate the average
interest rate paid by Portugal on its debt. Using this number for the interest rate, calculate
the sustainable primary and overall deficit (as a % of GDP) for Portugal to maintain the
debt level from 2010.
2010
Portugal
Gross domestic product, current prices Euros, Billions
172.70
Gerneral government overall balance
% of GDP
Gerneral government overall deficit
% of GDP
-9.14
General government primary balance
% of GDP
General government primary deficit
% of GDP
General government net debt
% of GDP
88.70
Current account balance
% of GDP
-9.89
9.14
-6.28
6.28
g V Debt
g V  i Debt


V
V
1

g
GDP
1

g
GDP . Average
Sustainable deficit is
. Sustainable primary deficit is
Interest Payments Interest Payments (%ofGDP )

Debt
Debt (%ofGDP )
interest rate i is
= .
Debt % of GDP
Net Interest
Average
Sustainable
Sustainable Primary
88.70
2.86
0.032255519
2.163365854
-0.627853659
5
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14. (2 points) Look at the following chart. Relative to France, has Germany become more or
less competitive with France since the world financial crisis? Explain.
Trillions of Euros
Unit
Constant
Total
Labor Costs Price GDP Labor Costs
2007
2011
2011
France
0.7
1.6
1.2
Germany
0.65
2.2
1.8
ULC = Labor Costs/Constant Price GDP =
Trillions of Euros
Unit
Constant
Total Unit
Labor Costs Price GDP Labor Costs Labor Costs
2007
2011
2011
2011
France
0.7
1.6
1.2
0.75
Germany
0.65
2.2
1.8
0.818182
In 2007, labor costs adjusted for productivity were relatively cheap in German. In 2011,
labor costs relative to productivity were relatively low in France. So France became more
competitive.
15. (2 points) In September 2012, the current account balance of Thailand was 54 billion
baht. The Capital Account was exactly 0. The Financial Account indicated 7.5 billion
baht of net inflows. The Bank of Thailand also estimates 5.5 billion baht of unmeasured
inflows. How much net foreign reserve assets does the central bank acquire?
Net capital outflows were 54 billion. The total measured and unmeasured inflows was 13
billion (7.5+5.5). So 67 = 54 + 13 billion of foreign reserve assets were acquired.
7
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Description
16. (4 points) Name the two main types of monetary policy anchors.
Type A. Fixed Exchange Rate
Type B. Inflation Target
Name an economy that practices each type.
Type A. HK
Type B. Korea, sweden
A country receives a surge of capital inflows. Explain the mechanism through which the
current account adjusts for countries of each type.
Type A.
To avoid appreciation, the central bank must acquire foreign reserves to match inflows with
outflows.
Type B.
Exchange rates appreciates so trade increases.
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17. (2 points) Read the following excerpt from http://www.economist.com/node/9687923
ONCE, Japan's department stores were
symbols of modernity. In 1673 Mitsukoshi, the
oldest, introduced the then-radical innovation
of fixed prices. At the turn of the last century,
its flagship store was the first building in Japan
to have central heating and escalators, and
one of the first big shops in the country to
allow customers to wear shoes.
Nowadays, however, depato, as department
stores are known in Japanese, seem stodgy.
Customers are deserting them in favour of
speciality clothing stores and malls. Moreover, consumer spending is flat and the population
is declining. Sales have fallen across the industry for a decade, and profits with them.
Goldman Sachs, an investment bank, expects them to fall further this year. Because
productivity is low and operating costs are high, earnings are meagre. Mitsukoshi, for one,
has posted losses for six consecutive years. The value of the land on which its stores sit is
now thought to be higher than that of the company itself. Department stores have the
lowest productivity in the Japanese retailing sector after mom-and-pop outfits, and are
around 25% less efficient than their counterparts in America.
Describe briefly, the sorts of policies that the Japanese government might adopt according to
the McKinsay study on sectoral productivity to boost outcomes in this sector.
The retail industry is very competitive. Progress is made by the frequent exit of lagging firms
and the entrats of new firms. The government should seek policies which make it easier for
firms to exit by trimming their workforce or declaring bankruptcy. At the same time, they
should limit the regulatory burden on entry into the workforce.
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18. (3 points) The World Values Survey argues that cultures can be best explained by
looking at 2 key dimensions.
a. Label the axes of the following chart with these dimensions.
b. Country A has a very high divorce rate. Represent country A as a point on the graph.
c. Place Hong Kong or other East Asian growth countries on the graph.
2
H
K
A
___Secular_______vs,_Traditional_____________
0
-2
0
___Suvival_____vs, _____Lifestyle____________
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2
19. (4 points) Economic researchers find that in the post-war era that GDP per capita growth
has been just as high in non-democracies as in democracies. However, we know that
there are other measures of welfare beyond per capita GDP. Considering the points made
by Nobel laureate Amartya Sen about “Democracy as a Universal Value,” offer
arguments that might explain why democracy might affect these measures beyond their
effect on GDP.
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20. (3 points) You have information on exports from France in two key industries along with
the total World level of exports of these industries. Construct three indicators of
competitiveness for these industries and place them on a bubble graph.
2001
2011
Total
Total
French
World
French
World
Exports Exports Exports Exports
17
102
50
150
7
28
15
75
Billions of $
[792] Aircraft & equipment
[112] Alcoholic beverages
a. Exports as a share of world exports
2011: Aircraft 1/3. Wine 1/5
b. .Increase in exports as a share of world exports.
2001: Aircraft 1/6; Wine ¼ ; Increase Aircraft 1/6, Wine -1/20
c. US dollar value of exports.
Aircraft 150; Wine 75
__Exports %__________
Aircraf
t
Wine
0
0
__% Change in Exports_______________________
End Exam
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