List the four components of GDP

- Consumption spending (household and individuals)

- Investment (firms
- Government spending
- Net exports = exports - imports

GDP = Consumption + investment +Government + (exports – imports)

Explain how idiosyncratic shocks differ from correlated shocks, and the implications for insurance of
these different types of shocks.

Idiosyncratic – effects households

- Best delt with insurance as a group of people are effected as others are still making
payments to the scheme

Correlated – effect groups people

- Everyone needs their money out at once, but there is a high risk of the insurance company
failing.

What are three types of unemployment?

- Structural
o When the skills demanded in the job market has changed and there is less demand
of those skills
- Friction
o Unemployment as you are moving in between jobs
- Siclical
o Unemployment that varies with the employment cycle.
 Employment cycle
 Peak – unemployment is low
 Goes through recession
 Low – high unemployment rate
 Growth
Recall the discussion in lectures of Okun’s Law, which relates changes in the unemployment rate to
changes in output (the real GDP growth rate). The following charts show these relationship for six
countries. Use the lines of best fit on the scatter plots to answer the following questions:

a. Which country has a coefficient for Okun’s Law that is most similar to the value recently
estimated by the IMF for New Zealand (and mentioned in lecture notes).

Okun’s law is relationship between a country's unemployment and economic growth rates. As GDP
increases the unemployment rate decreases.

New Zealand co-efficient = -0.4%, therefore is the GDP increases by 1% the unemployment rate
decreases by 0.4%

America has the most similar co-efficient. They have similar co-efficient has they have relatively
flexible markets.

b. Which country’s unemployment rate shows the least sensitivity to fluctuations in the growth
rate of real GDP? Discuss possible reasons for this.

Japan has -0.02%, they are not effected by GDP growth as they have a low co-efficient rate. There is
no change in employment has they have a less flexible market, as they are less inclined to not lay-off
workers during recession. As they have a lifetime employment agreement.
 c. The scatter plots highlight 2009 as having values that seem to be outliers in most countries
(not so much in Brazil). What can account for the same year being an outlier in multiple
countries, and what is one macroeconomic implication of this correlated shock?

Global financial crisis caused substitutional falls in GPD in some countries which cause sharp
unemployment rises in some countries. Cause by housing market in the U, as they were giving out
loans to people who could not pay it back.

Make sure relate it back to the equation (GPD = Consumption + investment +Government + (exports
– imports)

The following diagram shows the path of income for a household that receives news about an
expected rise and then a fall in future income at the depicted times

A. If the household is not credit-constrained, then it will consume the same level after t = 1.

Incorrect, because if the household is not credit-constrained they are able to borrow money and
smooth out their consumption, but consumption will not stay steady as income rises they have to
pay back the money borrowed

B. If the household is credit-constrained (not able to borrow) and has ‘weakness of will’
(household or individual cannot save), then its consumption will match precisely its income
path.

Correct, they are going to follow the path and because they have weakness of will as every dollar
earned is going to be spent (consumed). (Income = consumption)

C. If the household is not credit-constrained but has ‘weakness of will’, then it will borrow at t =
1 and save at t = 3.

Incorrect, income will be = to consumption at all times (weakness of will) and they are also credit-
constrained meaning they cannot borrow money.
 D. If the household is credit-constrained (cannot borrow) but does not have ‘weakness of will’,
then it will borrow at t = 1 and save at t = 3.

Incorrect as they have weakness of will

Although the lecture notes have the standard circular flow diagram, which leads to what should be
two equivalent ways to measure GDP (the expenditures-based (GDP(E)) and the value-added based
(GDP(P)) in recent years in New Zealand the two measures have diverged, as seen here.

The gap between these two measures is about $8 billion, or almost three percent and it has
especially shown up in the last year. This is not the only measurement puzzle about GDP in New
Zealand during the course of the pandemic-induced lockdowns and the effective closure of the
border to arrivals and departures. Please list some of the difficulties that Statistics New Zealand
likely faced in measuring the value of economic activity during these lockdown-affected periods.
Your discussion will benefit from having previously read this blog post by a former RBNZ senior
economist: https://croakingcassandra.com/2021/09/20/puzzling-over-the-new-zealand-macro-data/

- On-going survey works, rely on face-to-face interviews. Due to lockdowns it was not possible
therefore the lines started to