Econ 114 Javier Birchenall Due date: Tuesday, October 5, 2010

Problem set 1: PPP and basic growth facts

The following problem set will serve two purposes. First, it will acquaint you with some basic measurement perspectives and with some growth facts that you will seek to explain later in the quarter. Second, it will refresh your memory about the use of Excel. If you have never used Excel before, please see Introduction to Excel. Students who are already familiar with Excel, but not the specic operations required for this lab, may nd Excel Hints for Lab 1 at the end of this assignment useful. Plan to spend 6 hours (maybe more) on these questions. Please return the problem set on time (next Tuesday during class), remember you have the chance to miss one and only one, use it wisely. If you have any problems regarding the questions please contact me immediately by e-mail: jabirche@econ.ucsb.edu. Good luck!

I. Purchasing power exchange rates (50%) Suppose there are only two goods produced in the world: computers, which are traded internationally, and ice cream, which is not. The following table sows information on the production and prices of computers and ice cream in two countries:

Richland Poorland

Computers produced per capita 12 3

Ice cream produced per capita 4 1

Price of computers in local currency 2 1

Price of ice cream in local currency 4 1

1. Calculate the level of GDP per capita in each country, measured in its own currency. 2. Calculate the market exchange rate between the currencies of two countries. 3. What is the ratio of GDP per capita in Richland to GDP per capita in Poorland, using the market exchange rate? 4. Calculate the purchasing power parity (PPP) exchange rate between the two currencies. 5. What is the ratio of GDP per capita in Richland to GDP per capita in Poorland, using the PPP exchange rate? II. Lab exercise with actual data (50%) In this lab, you will document cross-country dierences in income and growth rates to help motivate the study of growth throughout the semester. The data is available in an Excel spreadsheet on the class web page, econ.ucsb.edu/~jabirche/teaching.html. The data denition is also available on the web page. 1. Calculate the average level of real per capita income in 1960 and in 2000 for all the countries in the data set. What is the minimum per capita income? What is the maximum? How has the distribution of income changed over time?

2. Calculate the growth rate of real per capita income over the time period 1960 to 2000. Note that you need observations for both years to compute annual growth rates. Recall also that the growth rate is given by: 1/n Xt+n 1, for observations Xt+n and Xt . g= Xt Sometimes the growth rate is multiplied by 100 to obtain percent values. What is the average growth rate for all the countries in your data? What is the minimum growth rate? What is the maximum growth rate?

3. Consider three subsets of countries: Western Europe, Asia, and Africa. Calculate the minimum and maximum level of income per capita for countries in each of these groups in 1960 and in 2000. What patterns can you identify in the growth of income and in the dispersion of income in these regions? 4. Take the maximum growth rate that you calculated in number 2 and apply it to the poorest country in 1960. Then take the minimum growth rate that you calculated in number 2 and apply it to the richest country in 1960. How would these dierent growth rates aect the level of income in these countries in 2000? Explain how this calculation demonstrates the importance of the study of long-run growth. 5. Sort the data by the growth rates you calculated in number 2. Identify the 10 fastest growing and the 10 slowest growing countries. Do the fast growers have anything in common? Do the slow growers? Do these lists suggest potential ideas for investigation of the determinants of growth?

Excel Hints for Problem set 1 part II 1. Finding averages, minimums, and maximums are functions in Excel. Use the =AVERAGE(.), =MIN(.), and =MAX(.) functions to nd these values. (A . represents the range of cells over which to do the calculations. 2. Growth rates can be calculated with the formula on page 10 (or listed above). Type this in for the rst country and then copy the formula down for the remainder of countries. 3. The data contains indicator variables for each region. If you sort the data by each of these indicator variables, you will be able to use the =AVERAGE(.), =MIN(.), and =MAX(.) functions to nd these values. To sort data, follow the instructions regarding sorting data that appear after the Excel Hint to question 4. 4. To apply a growth rate to a level of income, nd a blank cell in Excel and multiply the level of income times (1 + the growth rate). 5. See the instructions re sorting data in Excel below.

Sorting Data In addition to performing calculations, spreadsheets allow you to sort your data either alphabetically or numerically. To sort the data, 1. Highlight all of the data you would like to sort. 2. Under the Data menu, choose Sort. 3. Select the column you want to sort the data by in the Sort By eld. You can choose ascending sort (smaller to bigger) or a descending sort (bigger to smaller). You can also put in secondary sorting criteria by typing something in the And Then elds. For example, if you had a list that you wanted to sort rst by last name and then by rst name, you would enter the column that contained last names in the Sort By eld and the column containing the rst names in the Then By eld. If you leave the Then By eld blank, Excel will perform the sort without a secondary key. 2

4. Click on the OK button and Excel will perform the sort. When sorting data, it is extremely important that you highlight all of the data that goes together. Otherwise, Excel will only sort a subset of your data. For example, suppose you wanted to sort your data by per capita income. If you sort by income and dont include the country name column in your data range, Excel will only sort the income column and not the country name column. The result would be a spreadsheet with incomes sorted, but the country names next to the incomes would not be the correct ones.