Max Isabelle

Dr. Rohit
Econ 104H
4/17/16
Final Exam Econ 104H
1)
a. The GDP of a nation is the market value of all final goods and
services produce in a given time period. GDP is comprised of four
components Investment(I), Consumption(C), Government(Consumption
and Investment) and export minus imports(NX).
GDP=Investment +Consumption+ Gov+ ExportsImports
The above equation is comprised of three main actors; Firms,
Households and Government. There are also foreign purchases and
foreign products but they are straight forward. The three actors
described above can participate in consumption and investment. The
aggregate activity of these actors and net exports make up GDP.
GDP has been a successful indicator because it measures what is at
the heart of a strong economy production of goods and services. It is
able to approximately track the growth in the economy in terms of
production. GDP can be adjusted for inflation across a period of time
to compare GDP from one time period to another within one country, or
even country to country. Which provides a means to universally track
the progress or regression of countries economies relative to one
another.
b. GDP is limited in two ways accuracy and scope. It always involves
some guesswork when trying to aggregate so much data to come up
with one number. Also, all countries come up with their GDP slightly
differently. The scope is the major limitation, the scope of data GDP
encompasses as an economic indicator is vary narrow. It is based
100% on final products in an economy. It is an indicator predicated on
material wealth, it leaves out the big picture, are people happy in the
economy? The only thing being reached for in the GDP approach of
measuring the economy is economic growth. Which has extricated the
human element from measuring the well being of the economy, and
reduced the well being of the economy to one number, GDP.
c. To pick three indicators to measure the well being of the citizens
they would have to indicators that can be universally applied to all
individuals in the economy.
1) Number of successful new businesses each year
-This indicator will be used as the measure of economic growth.
For a new businesses to become established they will be provide some

Max Isabelle
Dr. Rohit
Econ 104H
4/17/16
sort of good or service which will inevitably grow the economy. Also,
when people are willing to incur the risk associated with starting a
business it is a good sign that peoples sentiments are bullish on the
state of the economy. Which is good since a lot of the fluctuation in
the economy can be attributed to the emotions of people.
2) Amount of Vacation time taken on average across a population
-This indicator will measure the populations feelings of security
and even happiness in their position, and their disposable income. If
this indicator is high it means people are confidant they will have a job
in the future and may even receive a promotion. Leading them to
spend money. If this indicator is low people are working hard to try to
make more money will they know they will have a paycheck.
3) Promotion level in high paying jobs
-This indicator will show how many, what could be considered,
higher salary jobs are being created in the economy. This will
expresses the state of big business in an economy. Big Business play
such a high role in the economy as whole this is an important indicator
of there sentiment in regard to the future. If this indicator is high it
mean these multi-billion dollar business are preparing for a productive
future. Which can only mean good things for the economy as a whole.

Max Isabelle
Dr. Rohit
Econ 104H
4/17/16

#2
a.
Budget Constraints:
t=1 Py1=Pc1+b1
t=2 Py2+b1(1+R)=Pc2
P c1 +

P c2
P y2
=Py1 +
1+ R
1+ R

c 1+

c2
y
= y1 + 2
1+ R
1+ R

c 1+

c2
=W
1+ R

U(ci)=U(c1)+U(c2)
max
Subject to:
Budget Constraints
t=1 Py1=Pc1+b1
t=2 Py2+b1(1+R)=Pc2
P c1 +

P c2
P y2
=Py1 +
1+ R
1+ R

c 1+

c2
y
= y1 + 2
1+ R
1+ R

c 1+

c2
=W
1+ R

L=u ( c 1 ) +u ( c 2 ) + (W c 1
dy
=U ' ( c 1)
d c1

c2
)
1+ R

=U ' (c 1 )

Max Isabelle
Dr. Rohit
Econ 104H
4/17/16
dy

=U ' ( c 2 )
d c2
1+ R
c
dy
=W c1 2
d
1+ R

U ' ( c 2 )=

U '( c1 )
1+ R

U ' ( c 2 ) (1+ R )=U ' (c1 )

(1+ R)
W
1+
1
c 1=
W
1+
c 2=

Eulers equation shows how over a two period model decisions on how
much to consume are made. What is being calculated in the marginal
utility of consumption U(Ci). The marginal utility of consumption over
the two periods will be maximized in different ways depending on two
factors. The two factors at play are B(the discount factor) and 1+R
(the interest rate). Both these factors work to decide what to consume
in period 2. If B is less than one consumption in period 2 is valued
less than period 1. When 1+R goes up the amount you consume in
period two can be (X-C1)(1+R) which is how the model shows the
incentive to save money for future consumption.
R =C 2 B =C 2 R =C 2 B =C 2
B. For a house to participate in perfect consumption smoothing they
have no preference for c1 or c2. This means (The discount
factor)=1. The other factor is R which is the interest rate. The
interest rate has to be 0 for an individual to complete perfect
consumption smoothing.