All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Questions of the Day
Macromeasurement

Output market

1. GDP is generally accepted as a measure of economic welfare-a higher GDP figure indicating a stronger economy. Please explain what impact the following will have on GDP: a devastating hurricane and higher crime rates.

2. What are the 'biggest' movies of all time?

3. In the mid 1990s the stock market was booming in the US as the price of stock rose rapidly. How much of an impact did this have on the inflation rate in those years?

Labor market

1. What is the relationship between the labor force participation rate and GDP?

2. Who are the baby boomers and why do we care so much about them?

3. Jeremy has been doing some soul-searching on his life. He feels as though he has gotten nowhere financially in the past few years despite the fact that his current income in $35,000 and only 5 years ago he was making $30,000. Do you think he should lighten up? Is he actually better off today? What do you need to know to answer that question?

4. The majority of American families live in their own homes so it is likely that someday you will be buying your own home. But how much will it cost? Let's assume that you will be buying your home in ten years. If the current average price is $155,000 and prices are expected to rise 5 percent per year, what can you expect to pay for that house in 10 years?

5. There has been much written about the price index which should be used for indexing social security. Economists generally agree that the existing CPI overstates inflation and suggest that Social security be indexed by something less than the inflation rate based on the CPI. How important is this debate? To see the magnitude of the issue, I would like you to estimate the savings in social security expenses by an adjustment. In 1995 social security expenses of the federal government were $336 billion. Let's assume that the CPI is expected to increase at a rate of 3 percent per year for the next decade. Please calculate what social security expenses will be in ten years if they are indexed to inflation. Then calculate the expenses if we use an adjustment that is 1 percentage point lower than the inflation rate as measured by the CPI (2 percent).

6. What's happening with the economy? Just when I thought I was beginning to understand the measures we use to understand the economy I find the following headline: "Employment down, but so is the unemployment rate." How can this be? A decline in employment is taken as a sign that the economy is picking up steam since fewer people are working, while the falling unemployment rate indicates that a smaller percentage of the labor market is not finding jobs. How can the labor market be giving such mixed signals? [Hint: check out that definition of unemployment rate].

7. You have heard much about the baby boomers-probably enough so that you do not want to hear any more. But let's try one more boomer question. What would you expect to have been the impact of the boomers on the labor market in the 1970s? (Hint: think about how old they would have been].

Capital and foreign exchange markets?

1. What is a mutual fund and what are the similarities between it and a pension fund?

2. The government has a truth in lending law that "forces" lenders to give a "truthful" answer to the question: What is the interest rate?  Unfortunately, these laws do not protect consumers completely.   Can you explain when an increase in a scheduled interest rate is actually a decrease in rates?

3. Interest rates are the price of funds so why are there so many rates?  What is the current mortgage rate?  What about a car loan rate and the rate on student loans?

4. What will happen to the price of a bottle of French wine if the $/franc exchange rate falls from 5 francs to the $ to 4 francs to the dollar?   The wine now costs $20 a bottle.

5. What is happening to the flow of dollars if there is a current account deficit in the US?

Additional Questions:

1. The following data has been reported for an economy. The CPI data is end of the year data.

• a. In what year was there a recession?
• b. How much did current dollar GNP increase (%) from 1985 to 1993?
• c. What was the inflation rate for 1992? for 1990?

2.The data below pertains to the Finlandia economy. The interest rates are yearly averages and the price level and wage data are for end of year.

• a. Calculate real wages for 1994.
• b. Calculate the real interest rate for 1995.

3. The data below pertains to the U.S. economy. The figures are for end of year.

GDP

• a. Fill in the missing numbers.
• b. In what year was the economy producing closest to capacity (where the unemployment rate would be lowest)? Which year was it operating furthest from capacity?
• c. What was the inflation rate in 1979?
• d. What is the base year used for data? If you cannot give me a specific figure, at least determine the narrowest possible range of years in which it would be.

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