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Macroeconomics Home-work

Q1) List and describe the four determinants of Productivity. Productivity is a measure of the rate at which outputs of goods and services are produced per unit of input (labour, capital, raw materials, etc.)The four determinants of productivity are: (1) Physical capital, which is the stock of equipment and structures that are used to produce goods and services; (2) Human capital, which consists of the knowledge and skills that workers acquire through education, training, and experience; (3) Natural resources, which are inputs into production that are provided by nature; and (4) Technological knowledge, which is societys understanding of the best ways to produce goods and services.

Q2)In what way is your (soon-to-get) MBA degree a form of capital? Our (soon-to-get) MBA degree, like all educational degrees) is a form of human capital. The skills learned in an MBA class will increase the individuals productivity. Additionally, the individual will gain a competence (certified by a degree) which is highly valued in most, if not all institutional settings. By pursuing the MBA degree for working executives, we are also reducing our opportunity cost commonly associated with investment in human capital. To elaborate, when students are in class for a full-time degree, they cannot be producing goods and services for consumption and they forego the wages that they could have earned. In less-developed countries, this opportunity cost is considered to be high; as a result, children often drop out of school at a young age. Thus we are acquiring human capital (of a lesser value than a full-time MBA, but nevertheless) at a reduced level of opportunity cost.

Q3) Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving? Higher saving means fewer resources are devoted to consumption and more to producing capital goods. This capital formation leads to more industries being set-up, increasing employment and raising income levels, more money available for spending,higher quality goods produced,and more money available forsavings and if the savings are again turned into investments the cycle will continue. This leads to economic growth andbetter standards of living.Therefore in the long run, the higher saving rate leads to a higher standard of living.

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A policymaker might be deterred from trying to raise the rate of saving because doing so requires that people reduce their consumption today, which will severely affect economic growth in the short run. Also, the higher standard of living associated with the rate of savings will take a long time to materialize. Therefore it needs to be a balancing act.

Q4) Suppose that society decided to reduce consumption and increase investment. a. How would this change affect economic growth? b. What groups in society would benefit from this change? What groups might be hurt? a. In the short run, if expenditures shift from consumption to investment, it will affect the cash flow and profitability of most companies owing to lower demand. Prices of goods and services will have to be lowered, and excess stocks might be put to waste since consumption and demand have dropped. However in the long run this will positively affect the economy, since investment increases productive capacity, which in turn leads to greater economic growth, as per answer to Q3). b. Logically, if the pie is made larger, then, in principle, everyone should have a larger share. Therefore, the change should benefit most people in society as their incomes should increase as the result of faster economic growth. However if we delve deep, there might be a transition period in which workers and owners in consumption-good industries would get lower incomes.

Q5) What is the opportunity cost of investing in capital? Do you think a country can over-invest in capital? Do you think a country can over-invest in human capital? Explain. The opportunity cost of investing in capital is the loss of consumption that results from redirecting resources toward investment. The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital. Because of diminishing returns, higher saving leads to higher growth for a period of time, but growth eventually slows down as the economy approaches a higher level of capital, productivity, and income.A country can "overinvest" in capital if people would prefer to have lower spending on consumption and more on investment in capital which is subject to the abovementioned law of diminishing returns. A country could "over-invest" in human capital if people were overqualified for the jobs they could get for example, if the best job an MBA in such a countrycould find is data entry.

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Q6) Describe some forms of private spending that represent consumption, and some forms that represent investment.The national income accounts include tuition as part of consumer spending. In your opinion, are the resources you devote to your education a form of consumption or a form of investment? Consumption is the utilization of money to satisfy a need in the present with no future monetary gain envisioned. Private spending that represents consumption includes buying food, clothes, medicines, etc. Investment on the other hand is spending money with the purpose of possible gains in the future. Private spending that represents investment could includepeople buying houses, healthcareor some shares in a company; firms buying computers, etc. For arguments sake, education can be considered as both a form of consumption and investment. People argue consumption because you use money to pay for your tuition, and it reduces your cash on hand. However, personally I feel it is an investmentbecause all that spendingis being used to gain a degree, which will hopefully increase ones value in the job market, thus leading to greater returns in the future.

Q7) Describe some forms of government spending that represent consumption, and some forms that represent investment. In your opinion, should we view government spending on health programs as a form of consumption or investment? Government spending that representsconsumption is spending to ensure the working of the government. It includes paying salaries to its employees, paying workers to administer government programs, etc. Government spending that representsinvestment involves spending with future gains envisaged for its citizens. It includes building railways, dams, buyingmilitary equipment, etc. In my opinion, government spending on health programs is a form of investment in human capital. The government is spending money now with the purpose of possible gains in the future by way of the safeguarding the health of its citizens.

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Q8) International data show a positive correlation between political stability and economic growth. a. Through what mechanism could political stability lead to strong economic growth? b. Through what mechanism could strong economic growth lead to political stability? a. Political stability could lead to strong economic growth by making the country attractive to investors. The increased investment would raise economic growth. On the other hand, political instability is likely to shorten policymakers horizons leading to sub-optimal short term macroeconomic policies. It may also lead to a more frequent switch of policies, creating volatility and thus, negatively affecting macroeconomic performance. Political instability is also associated with greater uncertainty regarding future economic policy, it is likely to adversely affect investment and, consequently, physical capital accumulation.It is also possible that political instability adversely affects productivity. By increasing uncertainty about the future, it may lead to less efficient resource allocation. Additionally, it may reduce research and development efforts by firms and governments, leading to slower technological progress. Violence, civil unrest, and strikes, can also interfere with the normal operation of firms and markets, reduce hours worked, and even lead to the destruction of some installed productive capacity. Finally, human capital accumulation may also be adversely affected by political instability because uncertainty about the future may induce people to invest less in education. b. Strong economic growth could lead to political stability because when people have high incomes they tend to be satisfied with the political system and are less likely to overthrow or change the government.

Q9) International data show a positive correlation between income per person and the health of the population a. Explain how higher income might cause better health outcomes b. Explain how better health outcomes might cause higher income c. How might the relative importance of your two hypotheses be relevant for public policy? a) Higher incomesmay provide easieraccess to better nutrition,better health-care options, good work-life balance, etc. thus leading to better health outcomes. b) Better health outcomes may lead to higher productivity (less downtime) and more efficient decisions due to reduction of stress levels thus leading to higher incomes. c)The relative importance of the two hypotheses can be seen in its impact on government spending on healthcare. While a good public health policy may increase overall economic performance, the costs, especially in developed countries, are mostly borne by the government. So it is a trade-off between how much money for healthcare is available, justified and necessary versus actual benefits vis--vis economic growth.

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