MACROECONOMICS: THE EUROPEAN PERSPECTIVE ECB1MACR 2021/2022 – PERIOD 3 ASSIGNMENT – WEEK 1 For all CORE chapters: always test your knowledge for the Multiple Choice questions. We will not discuss these in class as the online version delivers you the correct answer and the motivation. For all tutorial sessions: please prepare before you join the tutorial: study the literature, view the knowledge clips, view and participate in the Q&A Lecture, and prepare the questions in this assignment. QUESTIONS TO PREPARE AND DISCUSS IN THE TUTORIAL TUTORIAL 1: TUESDAY FEBRUARY 8 The tutorial will start with a round of introduction, after that we will discuss the questions. Question 1: Recap Study the literature and view the knowledge clips. Present your questions on this content. Anything to be explained/discussed? Question 2: Okun’s law Which correlation describes the Okun’s Law and what’s the mechanism behind this correlation? See figure 13.5: what would be a potential explanation for the relative high Okun’s coefficient for the US? And the relative high Okun’s coefficient for Japan? Question 3: Insurance Prepare CORE Exercise 13.5 (section 13.5). Question 4: Consumption smoothing a. CORE describes two strategies to deal with shocks. What are these two strategies and which are these insurances in your own situation? b. Why do people intend to smooth their consumption and which are the limitations? Again, how does this work out in your own life? c. See CORE figure 13.12. Explain the slope of the budget constrain and the position of the indifference curve. Explain the positions of A 1 and A11. Question 5: Household wealth and housing a. One of the clips presents the permanent income hypothesis has been presented. Explain the economic implication of this theory. b. See CORE figure 14.7. Explain the composition of households wealth. c. Explain with the help of the figure why most governments delivered financial support to firms to maintain their labour force in the covid-crisis? What would happen if many people do or fear to lose their job? Explain how the composition can explain the amplification of an economic crisis. Question 6: Investment a. Why is investment more volatile than consumption? b. What is the logic of the ‘investment coordination game’? TUTORIAL 2: THURSDAY FEBRUARY 10 Question 1: Correlation and causation CORE refers to the difference between causation and correlation. Explain the difference between the two concepts. Give some examples for which correlation does not imply causation. Question 2: National accounts calculation Assume a country Freedonia, which has two companies A, B that only produce for the domestic market. Company A produces car components which are sold to company B, which produces cars for domestic consumers. Company A only needs labour to produce car components. Company B needs labour and car components to produce cars, and for production of each car it always uses 5 components. In 2015 company A produces 50 car components and 50 car components are sold to company B. The price of each car component is 500. The wage bill (= average wage * number of workers) for company A is 15,000 in 2015. In 2016 company A produces 50 car components and 40 car components are sold to company B. The price of each component is 550 in 2016. The wage bill for company A in 2016 is 12,000. In 2015 company B produces 10 cars. It sells only 8 cars and the price of each car is 5,000 in 2015. The wage bill for company B is 20,000 in 2015. In 2016 company B produces 10 cars. It sells 12 cars and the price of each car is 6,000 in 2016. The wage bill for company B in 2016 is 20,000. a) Calculate nominal consumption and nominal investment in Freedonia in 2015 and in 2016. b) Calculate nominal GDP in Freedonia in 2015 and 2016. c) Calculate the growth rate of real GDP in Freedonia in 2016. Question 3: National accounts for the Netherlands The circular flow (figure 13.6) presents the three-way approach to estimate the GDP. The national accounts for the Netherlands are estimated by Statistics Netherlands (the CBS). Visit their site and search for ‘National accounts, approaches of domestic product (GDP)’ https://opendata.cbs.nl/statline/#/CBS/en/ You will encounter the GDP from the output, the GDP from the generation of income, and the GDP from the final expenditure. Let’s focus on the year 2020. a. b. c. d. What is total GDP for the year 2020? For the output-approach: which is the largest sector? For the income-approach: which is the largest component? For the expenditure-approach: present the composition of the GDP as presented in figure 13.7 (in percentages). e. For the numbers calculated in d: compared to the US, Eurozone and China: which components are high and which are low? f. The tables do not only present ‘value at current price’ but as well ‘value at prices of 2015’. What has been the inflation since 2015? Question 4: GDP and its alternatives As has been discussed in a knowledge clip, GDP is considered to be conventional measure for the size of the economy, though a flawed measure of living standards. Many alternative measures have been developed, like the OECD Better Life Index (referred to in CORE exercise 13.1). Visit the OECD site: http://www.oecdbetterlifeindex.org/#/11111111111 a. How has the Better Life Index been composed? b. One of the topics in the index is income. Is this equal to the GDP? Which are the 3 top ranked countries? What the position of your country? c. One of the other topics in the Index is ‘Work-Life Balance’. How has this index been composed and what’s the top 3 for this topic? d. The OECD Better life Index is just one of the many alternatives presented for the GDP as a measure of welfare and well-being. Why do most economists, policy makers and politicians still continue to focus on GDP and its growth figures? Question 5: Inflation One of the main topical issues for discussion among (macro)economists is the current level of inflation. a.Search on the OECD website for current inflation and the inflation forecast for OECD countries. The ECB estimates that the current strong rise in interest rates is temporary: https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/high_inflation.en.html b. Explain the ECB arguments for this estimation. c. What are the consequences of this position in the inflation discussion for the ECB monetary policy? According to Reuters is the Fed is expected to raise the interest rates this year: https://www.reuters.com/business/fed-raise-rates-three-times-this-year-tame-unruly-inflation2022-01-20/ d. What are the consequences of the expected increase in the interest rate on stock values? THE EMPIRICAL PROJECT Based on your presence in the Tuesday tutorial, your lecturer will form and publish the (random) groups. Please contact your colleagues in the empirical project group, exchange contact details, establish a Teams group for meetings, and discuss and agree on a weekly schedule for preparation and execution of the project work. The empirical assignment will be posted in the general assignment, the weekly course instruction. If necessary, the tutor will provide you with some explanation in the Tuesday tutorial. During the Thursday tutorial (s)he will give you the opportunity to present questions on the empirical assignment, so take care that you worked on the assignment before Thursday so you still have the opportunity to discuss with the tutor before you complete the assignment, which is due Friday Night. Please note that we will only discuss the assignment during the tutorial(s), not by mail or by chat outside the tutorial session.
