Macroeconomics Applications



ACCT500 – Economics Module – Week 7 Macroeconomics Applications

Paper due tomorrow

Part 1

This assignment includes three applications in three major areas in Macroeconomics: 1) Gross Domestic Product; 2) Unemployment and Inflation; and 3) Macroeconomic Policy. You must complete all three applications. Each of the application options are located in the textbook.

You will discuss the Options listed for each of the applications and will complete a draft essay for each of the applications. . About a pg each

APA format

APPLICATION 1 – Gross Domestic Product:

Prior to completing the application, students will need to review Chapter 5 and 6 to best prepare for the applications.

Option 1: The Links Between Self-Reported Happiness and GDP

The Links between Self-Reported Happiness and GDP

APPLYING THE CONCEPTS #3: Do increases in gross domestic product necessarily translate into improvements in the welfare of citizens?

Two economists, David Blanchflower of Dartmouth College and Andrew Oswald of Warwick University in the United Kingdom, have systematically analyzed surveys over a nearly 30-year period that ask individuals to describe themselves as “happy, pretty happy, or not too happy.” The results of their work are provocative. Over the last 30 years, reported levels of happiness have declined slightly in the United States and remained relatively flat in the United Kingdom despite very large increases in per capita income in both countries. Could it be the increased stress of everyday life has taken its toll on our happiness despite the increase in income?

At any point in time, however, money does appear to buy happiness. Holding other factors constant, individuals with higher incomes do report higher levels of personal satisfaction. But these “other factors” are quite important. Unemployment and divorce lead to sharply lower levels of satisfaction. Blanchflower and Oswald calculate that a stable marriage is worth $100,000 per year in terms of equivalent reported satisfaction.

Perhaps most interesting are their findings about trends in the relative happiness of different groups in our society. While whites report higher levels of happiness than African Americans, the gap has decreased over the last 30 years, as the happiness of African Americans has risen faster than that of whites. Men’s happiness has risen relative to that of women over the last 30 years.

Finally, in recent work Blanchflower and Oswald looked at how happiness varies over the life cycle. Controlling for income, education, and other personal factors, they found that in the United States, happiness among men and women reaches a minimum at the ages of 49 and 45, respectively. Since these are also the years in which earnings are usually the highest, it does suggest that work takes its toll on happiness.

APPLICATION 2: Unemployment and Inflation:

Prior to completing the application, it is highly recommended that students review Chapters 5 and 6 to gain a solid foundation.


Declining Labor Force Participation

APPLYING THE CONCEPTS #1: What factors account for the decline in the labor force participation rate in the last decade?

Since reaching a peak of 67.3 percent in 1999, the labor force participation rate has fallen to 62.9 percent by 2015. What can account for this decline?

Two factors have been prominently discussed by economists. The past decade experienced two recessions and low economic growth by historical standards. Perhaps a large number of individuals just decided that job prospects were too poor and left the labor force during this decade. An alternative explanation focuses on the baby boomers—the generation born after 1946. As this large generation ages, a significant number of the baby boomers will naturally retire and leave the labor force.

A recent study by the Federal Bank of Chicago suggested both factors were operative. Based on some statistical models, they estimated that about one-half of the decline in labor force participation was due to a longer run trend of increased retirements from the baby boomers. The rest they attributed to the sluggish economy. The staff of the President’s Council of Economic Advisers reached similar conclusions. They also estimated that one-half of the decline was due to the aging of the population. But they were only able to explain some of the remainder through traditional business-cycle effects. They suggested that increased schooling, higher rates of individuals claiming disability insurance, and the corrosive effects of long spells of unemployment on the skills and work ethic of individuals may also be causing some of the measured decline.

.Many economic time series, including employment and unemployment, are substantially influenced by seasonal factors. These are recurring calendar-related effects caused by, for example, the weather, holidays, the opening and closing of schools, and related factors. Unemployment due to recurring calendar effects is called seasonal unemployment . Examples of seasonal unemployment include higher rates of unemployment for farm workers and construction workers in the winter and higher unemployment rates for teenagers in the early summer as they look for summer jobs.

seasonal unemployment

APPLICATION 3: Macroeconomic Policy

Prior to completing the application, students will need to review Chapter 17 – Macroeconomic Policy Debates.

Option 1: Would a policy rule have prevented the housing boom.

Would a Policy Rule Have Prevented the Housing Boom?

APPLYING THE CONCEPTS #2: Did the Federal Reserve cause the housing boom through excessively loose monetary policy?

John Taylor from Stanford University has argued that the Fed’s “easy money” policy from mid-2001 through 2004 was largely responsible for the housing boom in the decade that ultimately caused so much financial damage. Taylor used his own model of monetary policy—the “Taylor rule”—to analyze the Fed’s behavior. In his prior work, he demonstrated that the Fed’s behavior could be closely described by a model that allowed for some monetary policy tightening and easing in response to output movements. Applying this model to the decade of 2000, however, Taylor found that, compared to past experience, the Fed was much too aggressive in lowering interest rates. Interest rates fell from 2 percent in mid-2001 to 1 percent by 2004. Past experience, however, would have suggested that the Fed would have raised interest rates to 4 percent by 2004—a very significant deviation.

Taylor then showed that housing starts—which are very sensitive to interest rates—would have been much lower if the Fed had not followed its easy money policy. The boom and bust would have been avoided. Finally, as an additional piece of evidence, Taylor looked at the experiences of European countries. There the same phenomenon occurred. Countries that deviated most from the Taylor rule—for example, Spain—experienced the worst boom and bust cycles for housing.

Part 2

Provide short detailed answers to the questions below.

There are two approaches to measuring a country’s macroeconomic activity, which are Gross Domestic Product, and National Income. What do each of these approaches measure. List at least one advantage and disadvantage of each approach.

1. Explain why buying a foreign car made abroad for $50,000 increases consumption by $50,000, but does not increase GDP.

2. What are the elements that make up GDP?

3. Explain why the very top athletes or entertainers would be more likely to change countries to reduce their taxes as compared with ordinary middle-class workers?

4. Suppose a country imposed tariffs on computer chips to protect its chip-making industries. What other types of firms in that economy might object to this policy?

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