1.Consider a Mercedes plant in US owned by German shareholders. In 2020, this plant:

Earns $160 million in revenue.

Buys $40 million of steel, aluminum and glass that it uses to construct cars.

Pays $25 million to share holders in Germany.

Pays $15 million of taxes to the US Federal Government.

Pays $60 million to US workers.

Buys $20 million of robots from a Korean robot producer. This firm is located in Korea. It has no US shareholders or workers.

What is this plant's (value added) contribution to US GDP, US GNP, Germany's GDP, and Germany's GNP?

(a) Contribution to US GDP:----------------

(b) Contribution to US GNP:...................

(c) Contribution to Germany GDP:..............................

(d) Contribution to Germany GNP:..............................

2.Zoom Communication Inc. decides to build a second headquarters in Pittsburgh. By 2022, it has constructed a large new structure (building) and has hired highly qualified computer scientists and programmers from across the country. They have relocated to Pittsburgh. You have data for Pittsburgh for years 2019 and 2022 on total GDP, the total value of capital and the total labor force (number of workers). You assume that production in Pittsburgh is described by a Cobb-Douglas production function with parameter = 0:4, where 1- represents the labor share.

(a) Give a formula that shows how you would calculate total factor productivity (TFP)

given the data that you have.

answer :

(b) (4 points) How do you think the development of a new software by

Zoo Communications Inc. will have impacted the data that you have? ( which variables have changed and whether they have risen or fallen)

Answer:

(c) How do you think the building of the HQ will have impacted the TFP measure that

you have calculated? Explain.

Answer:

(d) You use data on the educational qualifications of the new employees at Zoom to

construct an efficiency adjusted measure of the labor input. If you used this rather than the total number of workers as a measure of the labor input, what would likely happen to your assessment of TFP change in Pittsburgh over the years of 2019 to 2022? Why?

Answer:

(e) Zoom Communications Inc. organizes every year a conference in which it invites small local tech start-ups. The goal of the conference is share better corporate governance practices with local start-ups. This results in a knowledge spill-over in terms of successful management practices from Zoom Communications Inc. to the local start-ups. How does this affect Y , K, L and A? In this question, we measure L as the number of workers.

Answer:

(f) Suppose now that you have been looking at Pittsburgh data for the period 2005-2019, and you have observed that:

Pittsburgh Total Factor Productivity has increased

Pittsburgh average productivity of labor has decreased

Using the Cobb-Douglas production function, explain what must be happening to aggregate capital-input ratio K/L in Pittsburgh. In particular, what can you tell about the growth rate of capital relative to the growth rate of labor?

Hint: Express A as a function of average productivity of labor and capital per worker K/L .

Answer: