1st In-Class-Quiz 2020W vA w Answers Noon

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Page 2 of 6 Midterm Exam 2020-WINTER-QUIZ 1 – version A The Global Economy (MGMT 406) NAME: ________________________________________________ • You have 40 minutes for the exam, 1.00pm-1.40pm • Midterm is out of 30 points: 7 MC questions for 14 points, plus 16 points for short non-MC questions • Please read ALL the information provided in the questions. • The exam is “closed” everything – just you, your brain and some paper! • Good luck!

Page 3 of 6 PART I: Multiple Choice [14 points, 2 points for each of 7 questions] 1. The gains from trade are __________ the more similar the productive capacities of a country are to the rest of the world. a) smaller b) larger c) unchanged Answer-Key: As discussed in class, the more different the productive capacities of country from the productive capacities of the rest of the world, the larger the gains from trade 2. Imagine an earthquake strikes an economy. The earthquake has no death toll but destroys capital, what will most probably happen with the marginal product of labor? a) Increase b) Decrease c) Stay the same Answer-Key: Remember that capital (labor) “likes” labor (capital). The decrease in the stock of capital will reduce the marginal product of labor 3. Consider the 2-sector 2-factor model discussed in class (i.e. 2-sectors: computers and textiles, 2-factors: capital and labor, computers is the capital intensive sector). Suppose positive changes to the educational system increases the productivity of labor so that the productive value of a unit of L is increased. What would be the effect on the PPF? a) The PPF will stay the same b) The PPF will expand for both computers and textiles, but relatively more for textiles c) The PPF will expand for both computers and textiles, but relatively more for computers d) The PPF will contract for both computers and textiles, but relatively more for textiles e) The PPF will contract for both computers and textiles, but relatively more for computers Answer-Key: The question frames the increase in labor productivity to make clear it’s like an increase in L. Because textiles is the labor intensive sector, this change affects the textiles sector proportionally more.

Page 4 of 6 4. Consider the Hidalgo-Hausman type “product-trees.” Which of the following statements is false? a. The size of a node reflects in some way an industry’s economic importance b. Nodes in manufactured products are more connected than nodes in commodity- based sectors c. A larger distance between two connected nodes reflects that it’s harder for a country to move from one into the other. Answer-Key: distance between two nodes that are connected is just a visual aid to make a pretty tree, nothing more. 5. Of the 3 different ways in which GDP can be decomposed, which two are closest to how GDP is actually measured? a. the Income Approach, the Value Added Approach b. the Income Approach, the Expenditure Approach c. the Value Added Approach, the Expenditure Approach Answer-Key: See class-notes and class-discussion in week 1. 6. Consider the Standard Growth Model that we studied in class (i.e. 𝑌𝑌 = 𝐴𝐴𝐾𝐾 𝛼𝛼 𝐿𝐿 1−𝛼𝛼 ). If output growth is 9.5%, productivity growth is 2%, capital growth is 10%, and labor growth is 5%, what is the “capital share” alpha? a) 0.2 b) 0.3 c) 0.4 d) 0.5 Answer-Key: You need to use growth accounting: 9.5 = 𝛼𝛼 *10 + (1- 𝛼𝛼 )*5 + 2  9.5 = 𝛼𝛼 *5 + 7  𝛼𝛼 = 0.5 7. Which of the following series may have a strong influence on TFP estimates because it is not adequately captured in growth accounting? a) The Workforce b) Hours worked c) Capital d) Whether a country’s is a democracy Answer-Key: Capital is extremely hard to measure and so greatly affects productivity estimates. Take for example, the case we reviewed in class “The Tyranny of Numbers” (Note:

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Page 5 of 6 We also considered D as good. We thought the wording of the question was not clear. But “Democracy” is not the right answer. Being a democracy is a very stable characteristic and thus would be rarely picked up by growth accounting. ). PART II: Short Essay Questions [16 Points Total] QUESTION 1 [5 points]: Consider the Cobb-Douglas-function-based 2-sector 2-factor model discussed in class (i.e. 2-sectors: computers and textiles, 2-factors: capital and labor, computers is the capital intensive sector). Suppose there is an anti-trust 1 policy proposal that would break every firm in the economy into two firms. a) What would be the effect on the policy on the PPF? i. The PPF will stay the same ii. The PPF will expand iii. The PPF will contract b) Comment on whether it makes sense to analyze/discuss such an anti-trust policy through the lens of the models we have discussed. Answer-Key: With CRS the number of firms is irrelevant QUESTION 2 [5 points]: The Basic Ingredients of Macro-Economic Models a) What are the ingredients of every macro-economic supply-side model? b) In addition to the ingredients that you mentioned above, what else is necessary to “close the model” and pin down the equilibrium (i.e. what other ingredient(s) is (are) required)? c) Discuss in words or using a sketch why one cannot “close” (i.e. find the equilibrium of) a supply-side model on its own. Answer-Key: Every supply-side model needs resources (i.e. endowments of factors of production) and technology (i.e. a production function). To find the equilibrium of the economy we also need the demand-side, in particular the preferences of the consumers (i.e. “indifference curve). We cannot find the equilibrium of the economy with a supply-side model 1 ‘anti-trust’ means a policy designed to break up firms that are too large and therefore have price-setting power, e.g. Microsoft in early 2000s

Page 6 of 6 only, because “firms produce to satisfy the needs of consumers”. In simple words, a company does not produce to sell. QUESTION 3 [6 points] : Consider ‘Mineralistan’, a small open economy with a comparative advantage (CA) in the production of commodities (labeled ‘comm’), a low-skill-labor-intensive industry. Suppose ‘Mineralistan’ an increase in the demand for raw materials increase the relative price of commodities relative to a high-skill-labor-intensive industry aggregate which we call tech (labeled ‘tech’). a) Draw a graph in the two-industry space that shows how Mineralistan gains from the increase in the price of commodities (i.e. you need to compare Mineralistan before and after the change in prices). b) As we saw in the previous question, in the short run Mineralistan benefits from specializing in the production of commodities. But this may not be the case in the long run. Explain two potential future downsides that Mineralistan’s ministry of trade might be worried about because Mineralistan is so specialized in commodities. Depicting these downsides graphically is a bonus but if you run out of time, you should prioritize writing down clear economic statements. Answer-Key: To see the picture of how a change in prices affect Mineralistan you can refer to week 3 slides. The problem is that the shift in production towards commodities ends up in an expansion of the commodity sector and “de-industrialization”. This is problematic because in the long-term may make the country poorer, as the productivity in commodities usually grows at slower paces and the prices of commodities usually fluctuate a lot and are relatively cheaper.

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