Questions about course content for SPP 556, Winter 2004: Mar 21: > I'm having a hard time finding answers to the last two questions on the > WSJ article, "US Trade Deficit Hits a Record As Exports Sag." It seems > to talk about reasons why exports will continue to drop more than why > they did decrease in January, and more about increasing oil prices than > any quantities. > > If you could point me in the right direction for where to find these > answers, that would be great. I guess you are right that the only explanation given for falling exports is actually about the future, not the past, now that I read it more carefully. I had in mind the reasons given to "broaden the trade deficit going forward" and I missed the words "going forward". Good point. As for the quantity of oil imports, read carefully what it says that the higher oil prices will "offset." Mar 17: > On #2 of the problem set, when I differentiate the term C*T(Y) do I use > the chain rule? This seems logical, but this total differentiation stuff > we're doing doesn't make a whole lot of sense to me. Yes, use the chain rule. To be more specific, the function in the equation is C(Y-T(Y)), so the derivative of this with respect to Y is first the derivative of the C function with respect to its argument (what we're denoting by C'), multiplied then by the derivative of the argument (Y-T(Y)) with respect to Y (which is then 1-T'). All of this is straightforward differentiation, and is not special in the context of total differentiation. The total differentiation comes in only when you multiply this by the total differential, dY. Feb 18: > 1. Why could real wage increase and labor cost fall at the same time? > My answer is that labor cost also include health care and pension, among > many other in addition to wage. So it could be the firms invest less in > health care and pension while paying more to their employees. I am not > sure about my answer as it seems to me that nowadays firms are paying more > and more for health care for their employees. Any thoughts? I guess that makes sense, but you're right that empirically I think we are going the other way. Note what the article was mainly about: productivity. > 2. Mysterious fall of tax collection > I think the logic of Bush administration for tax cut is to simulate > consumers consumption, which in turn revive the economy. However, we learn > from our macro class that tax cut reduce national saving and generate > government deficit, thus crowd out the investment for business. Not > surprisingly, tax collection falls... No, crowding out investment wouldn't mean that tax collection falls. You need to look more carefully at the article to see what explanations it offers for the fall in taxes collected. > 3. Outsourcing in Open Economy > You suggested this question in class. It occurs to me that outsourcing > activities are no different to an outflow of capital. It reduces > domestic investment, reduces net export, thus reduces GDP. However, > outsourcing improves productivity, lower prices and expand overall > consumption. As a result, the impact of outsourcing to an economy is > ambiguous? I have seen outsourcing spoken of as an outflow of capital, but I don't see any reason for that to be the case. If a US company hires an Indian company to handle its phone calls, there is no need for any capital to be moved. Feb 13: > I have a question on Homework #2. > With regards to the effects of increase in “L” on “r” in Question 4, my > colleague and I discussed the following two ideas but could not > reach a conclusion. > > 1. The change in labor increases the output Y. However, the consumption C > does not increase as large as the increase of Y and that gap needs to be > made up by increase of investment I because the governmental expenditure > G is fixed. Therefore, the interest rate r goes down to increase I. The > answer: r (-). > > 2. The real interest rate r is equal to the marginal product of capital: > r = MPK = Fk(K,L). Thus, when L rises, Fk(K,L) also rises as W (=MPL = > Fl(K,L)) rises when K rises. In other words, when labor input increases, > it makes the existing capital scarce relatively and then the price of > capital, r, rises: r (+). > > Now, the answer key shows r(-) is the right answer. I wonder what the > fallacy of the explanation 2 above is. The second argument makes good sense, except that we've never (that I recall) said that r=MPK. Is that in the book somewhere? If so direct me to it, as I need to know. It is true that, in the very long run as the capital stock adjusts, one might expect r to equal MPK, since MPK is the benefit of investing and r is the cost, so investment will continue to add to the capital stock until r=MPK. But that doesn't happen within the time horizon for which the capital stock is fixed, as in this model. There is, however, clearly a flaw in this model as I've presented it and as I solved it for this problem. We specified I=I(r), without noting other things that matter for I. In fact, the rise in MPK that follows from a rise in L should indeed stimulate investment, and it would if we had written I=I(r,MPK). The question then becomes whether, at the initial r, I rises by more or less than savings. I suspect that my answer for this problem should have mentioned all this, but frankly I didn't think of it. Thanks for pointing it out. > Thank you very much for your reply. It was really helpful and I would > like to make it sure the following. > > Mankiw shows that the marginal product of capital is equal to “the real > rental price of capital” on page 51 of the textbook. So, what is the > difference between this real rental price of capital and the real > interest rate? (For me, both of them sound like the cost of capital > investment.) Also, is it correct that this real rental price of capital > (=MPK) rises when the labor input increases? The real rental price of capital is the amount that you would pay the owner of some physical capital to use it for a period of time. Of course in the real world, there are many different kinds of capital, only some of which are commonly rented to other users -- cars and buildings come to mind. But all physical capital could be rented out if anybody wanted to. And even the capital that is used by the owner can be thought of as having an implicit rental price: the earnings that the owner gets from it. This is not the same as the interest rate, which is instead what you earn from a financial asset, not a physical one. But as I described in my earlier e-mail, if the real rental price of capital is higher then the interest rate, it makes sense for someone to borrow at the interest rate and use the proceeds to accumulate physical capital. Since accumulating capital is a slow process, we don't expect this to happen instantly, but over time the accumulation of capital will push down the real rental until it equals the rate of interest. And yes, it is correct that, since the real rental price is the MPK, then it rises when the labor input rises relative to the capital input, and vice versa. Feb 4: > Attached to this e-mail is a copy of the excel spread sheet that I > made to answer the question from homework set #2 about information from > the FRED page. I am sure there is a faster way to remove information from > a downloaded data set, but I didn't know how to do it. I would be > interested in knowing how you solved the problem with out removing data > readings from the CPI and M1 data bases. [The problem here is that M1 is reported monthly, while the other data are reported quarterly. To get just the M1s wanted, this student had to do a lot of cut-and-pasting, or deleting, and this was cumbersome to do.] I've looked at it, and also at my own solutions. What I did was use the "vlookup" function, to look up just the M1s that I wanted. That's really easy once you know about that function, which I imagine most people don't. Another somewhat harder way would be to add a column of integers 1,2,3,1,2,3,1... (which you can do easily with a formula @if(previous=3,1,previous+1) (where previous is the cell above), lock in the values with paste special, and then sort on that column. There are probably other ways as well. Warning, you are using nominal GDP in place of Y, but Y stands for real GDP. And you are using the CPI instead of the GDP deflator, whereas the GDP deflator is the appropriate price level for deflating real GDP. (Which is not to say that you should be using real GDP and the GDP deflator at all, if you think about it.) Feb 2: > I have a question regarding your your Homework 2, question 4. I am > wondering whether there is a missing statement in this question. > In order to determine the actual effects of exogenous variables (e.g., K, > L etc.) on endogenous variables (e.g., Y, W, etc.), we need to know the > direction of change of exogenous variables. For example, if K increases, > so will Y ("+" in this case) holding everything else constant. But if K > decreases, Y also decreases ("-" in this case). However, your question > does not specify whether these exogenous variables will increase or > decrease. Sorry, I should have been clearer. It is customary, when asked about the effects of an unspecified change, to assume that the change is positive. I suppose this comes from the conventions of calculus, where dy/dx is the effect of an increase in x on y. But I should have stated in the question "Due to positive changes in". Jan 29: > 1)Who and How coordinate Fiscal Policy and Monetary policy in the United > States? In Japan the Ministry of Finance which is in charge of Fiscal > Policy is influencing the central bank, though seemingly the central bank > is independent. As far as I know, the Fed handles monetary policy alone, and without any influence from the Treasury department or other parts of the administration. There's an interesting article in the New York Times yesterday that deals with this, which I've placed a link to under Recent on my homepage. Fiscal policy is handled, then, by Congress and the President. > 2)Is it more efficient for stimulating economy to combine Fiscal Policy > and Monetary Policy rather than to use only either one? I don't think we have a way of answering that. It is certainly true that if we were to combine, say, a dose of monetary expansion with a dose of fiscal expansion, then we would get more expansion than if we used either separately. But "efficient" seems to suggest that we could use a smaller "amount" of the policies, if used together, to get a given expansion, and I don't think we have a way of measuring policies to make that sensible. If there is some sort of diminishing returns to the use of a given policy, then I suppose you would get such an efficiency result, but I've never seen it mentioned. > 3)What's the role of the Department of the Treasury in the United States? > You said fiscal policy is decided by the president and congress. Treasury > is just implementing the fiscal policy decided by them? Yes, I think that the Treasury department (with regard to fiscal policy) just implements, doesn't decide. Of course it can advise both the President and Congress and perhaps persuade them, but it cannot act on its own. Jan 19: > I have a question regarding homework one. In question-3, do you want us > to get seasonal adjusted data or unseasonally adjusted data? Either would be OK. I think I used unadjusted data myself, but I don't recall for sure.