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Macroeconomics Variables and Factors of Production - Homework Assignment

Introduction to the macroeconomic variables that will be used and worked with throughout the semester

In this homework assignment, we are getting our ‘hands dirty’ to get familiar with some of the major macroeconomic variables that we will be using and working with throughout the semester.

Our first chapter with ‘something to sink our teeth into’ will be chapter 3 and it is all about the factors of production, the labor market, and the production function.  Major variables in this part of the macroeconomy (i.e., the supply side of the economy) include, but certainly are not limited to, employment (denoted N), real wages (denoted w = W/P where W = nominal wage and P is the price index - typically the CPI) and real GDP (denoted Y).  When we move to chapter 4 we encounter many more major macroeconomic variables including consumption (C), investment (I), and the real interest rate (denoted r), among others.  We are going to use FRED as our source of data (many professional economists use this site, nice clean data!)[ FRED stands for Federal Reserve Economic Data.- see the FRED website.]

I provide you with the links to the data that is needed throughout this assignment. For an interesting look at the %ΔW vs. the %ΔP, see this graph from the FRED site.

As we move forward through the class, we are going to learn about some “business cycle facts.”  See page 290 in text, Chapter 8. In this first question, among other things, we are going to investigate the behavior of the real wage over the most recent business cycle. (See the National Bureau of Economic Research (NBER) site  - look at right hand side of page for the official dates of the most previous 4 recessions).  In particular, we are going to calculate the percent change in the real wage during the most recent recession (12/07 – 6/09) and compare it to the percent change during the most recent recovery, 7/09 to the present.

Nominal Wages  (W)  Price index CPI  (P)[ Hint, when deflating using a price index, we typically move the decimal two place to the left. For example, in 12/09 W = \$18.80 and the price index was 217.541.  The real wage is thus 18.80 divided by 2.17541.]

Let us go back to the 1981 – 1982 recession – review the NBER site.  Note that officially, this recession began in third quarter of 1981 and ended in the fourth quarter of 1982.

FRED stands for Federal Reserve Economic Data.- see the FRED website.
Hint, when deflating using a price index, we typically move the decimal two place to the left. For example, in 12/09 W = \$18.80 and the price index was 217.541.  The real wage is thus 18.80 divided by 2.17541.

FRED stands for Federal Reserve Economic Data.- see the FRED website.
Hint, when deflating using a price index, we typically move the decimal two place to the left. For example, in 12/09 W = \$18.80 and the price index was 217.541.  The real wage is thus 18.80 divided by 2.17541.

What is the main reason why economists would like to use the real wage when looking at changes over time?

In the homework folder there are two items you need to answer this question. One is a Ted Talk and the other is an NPR news story.

Why do economists use GDP to measure the wellbeing of society? Is this the best way to do so? Refer to the items above in discussing other ways to measure the overall wellbeing of a society.