Macroeconomic Environment and Policy

Section B: August 24, 2015

Homework 1
Due Date: August 29, 2015, 5:00 PM
Instructions: This is an individual assignment carrying at least 5 points towards your final
grades. No late submissions will be entertained. You should work on these problems
individually. While I encourage consulting your friends on how to solve these problems, copying
an answer directly off of another student is considered to be plagiarism against which
Alliance University has strict policy. Likewise, if you are approached by a friend to help
with a problem, explain verbally the problem, but do not share your answer script. I would
like to draw your attention towards the relevant materials in the Course Catalogue which
deals with the consequences of plagiarism. Softwares such as turnitin will be employed to
find instances of plagiarism from different sources.
The assignment needs to be typewritten, and should be submitted as a soft copy.
Every assignment should start with the two following things (without these two, your submission
wont be considered complete or accepted):
Honour Pledge: I understand the rules regarding plagiarism, which have been explained to me. I
agree to abide by these rules. I understand the sanctions that may result from violation of these
rules. These may include forfeiting marks on the assignment or in the course, inability to appear
for the midterms and the finals and therefore fail the particular course or suspension or expulsion
from the University.
Acknowledgement: The following peers (name them) have helped me understand certain parts
of the assignment. The assignment that was submitted contains my own work and was written in
my own words. (Name the people that have helped you in any way).
Dont write unnecessarily long answers. If you can explain everything using the minimum
numbers of words required, that is desirable.

Answer both Questions:

1. In the attached excel spreadsheet are data from World Bank on different countries. The
other excel spreadsheet will assign a country to each one of you. Using the data contained
here (and here only; i.e., dont consider any other offline/online sources like
Wikipedia etc.), analyze the economic condition of the country given to you using
national income account metrics taught to you in class, and discuss the evolution of those
metrics over time. Your analysis must be typewritten, and may include graphs, charts
and tables for better exposition.

2. Visit the National Planning Commission website:

http://www.planningcommission.nic.in/data/datatable/index.php?data=datatab . Here you
will find tables that contain information on Indian GDP and other indicators of wellbeing. These data are broken down state-wise. Your job is to take the data for your native
state (i.e., the state that you call home), and analyze looking at these tables alone (i.e.,
please dont consider any other sources, internet or otherwise) how your state is
performing currently, and how it has performed over the last decade relative to the Indian
average. You need to create a typewritten report not exceeding 1000 words
summarizing your main findings. Your report can contain information on things such
as GDP, growth rates, sectoral composition of output and its change over time, extent of
poverty and other things that you consider important to understand the economic
performance of your state (important: you need to choose the statistics based on your
judgment). When you cite a particular statistic from the Tables, you need to cite the
Table from which you are drawing the information. For example, if you are talking about
the literacy rate of Mizoram in 2001, you need to write The literacy rate of Mizoram in
2001 was 88.80% (Source: Table State-wise Literacy Rates (1951 - 2011)).

Not for Submission, for practice only:

1. Are the following counted in the Indian GDP? Why or why not?
a. The gourmet meals produced by a fine home chef
b. Your retired parents earn Rs. 100,000 as pensions from Govt.
c. Your parents spend Rs. 70,000 on buying goods and services during the year.
d. Due to a ban on selling liquor, Rs. 10 crore worth of liquor is now sold in the
black market.
e. Profits earned by Bharti Airtel on their operations in South Africa.
2. Citizens of the country of Mastistan produce apples and provide entertainment services
(flute playing). In 2013 they produced 50 lakh kgs worth of apples and decided on a price
of Rs. 100 per kg exclusive of taxes, with 40 lakh kgs consumed domestically and the rest
sold to neighboring countries. The MastiApple Corp., that produced and sold the apples,
employed workers to whom they paid Rs. 40 crores as wages. The Govt. taxed the sales
of apples at 3% rate for domestic sales and 5% rate for foreign sales. The citizens also
provided Rs. 25 crore (pre-tax) worth of flute-playing services, Rs. 15 crore in Mastistan,
and Rs. 10 crore in neighboring countries. These services were taxed at 5% domestically
and 7.5% for foreign transactions. The Mastistan citizens purchased Rs. 20 crore (pretax) worth of wine from neighboring countries, which was taxed at a 10% rate by the
Govt. The Govt. provided pensions worth Rs. 3 crores to its citizens, maintained a police
force that cost Rs. 6 crores, and additional Rs. 2 crores were spent in maintenance of
infrastructure. The Govt. also taxed income from wages at a 10% rate, and corporate
profits at a 15% rate. It treated income from flute playing as wages and not corporate
profit.
a. Calculate the magnitudes of GNP, GDP (at market price and factor cost), net
factor payments from abroad, net exports and budget deficit.
b. Verify that GDP measured using production (value-added), income and
expenditure approaches lead to identical results.
3. In the U.S. economy in 1991, real GDP was 4861.4 (in billions of 1987 dollars), the
capital stock was 13,806.2 (in billions of 1987 dollars), and employment was 118.4 (in
millions of workers). In 1992 the numbers were: real GDP 4986.3, capital stock 14,040.8,
employment 119.2. Suppose the production function in both years is Y =A K0.25N0.75.
a. Calculate total factor productivity for 1991 and 1992.
b. How much did total factor productivity grow from 1991 to 1992?
c. Calculate the percent increase in real output between 1991 and 1992.

d. Suppose tax incentives had raised the capital stock in 1992, making it 10% higher,
to 15,444.9. If employment didnt change, what would have been the percent
increase in real output between 1991 and 1992?
e. Instead of the increase in the capital stock in part d, suppose employment was
10% higher in 1992, making it 131.1. With the capital stock fixed at 14,040.8,
what would have been the increase in real output between 1991 and 1992?
4. What do you think are the biggest drivers of growth in your respective countries? Justify
(you may need to do additional research to properly answer this).