Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
PROBLEM SET 1 [Solution]
Part 1. Measurement
1. Answer questions using the Bank of Korea Economic Statistics System ([Link]
a) Construct a table showing the structure of expenditure-side GDP at current market prices for
the last two years. Include household consumption, government expenditure, gross capital
formation, net exports of goods and services, and statistical discrepancy.
b) Calculate the real growth rates of each component of expenditure-side GDP and contribution of
each component to the growth rate of GDP. Which component is the biggest source of GDP
growth in the last year?
c) Download and plot unemployment rates and real GDP growth rates for the past 20 years, using
Excel. What is the relationship between these two measures? Calculate correlation coefficients
between these variables, using Excel. Explain what happened during the 2008 Global Financial
Crisis and the 2020 Covid-19 crisis?
SOLUTION:
a) For example, Download nominal GDP for 2021 and 2022 and list all the components of expenditure-side
GDP. Note that the “nominal” GDP is at current prices, and the “real” GDP is at constant prices.
b) Use the growth formula (simple growth rate) for real GDP and calculate the contribution (percentage
points) as the change in value-added of each component divided by total GDP. The sum of contributions of
each component equals to total GDP growth rate. It is fine to download numbers for contribution directly.
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Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
Notes: In principle (in the textbook), government expenditure (G) is defined as the sum of
government consumption expenditure and gross fixed capital formation by government. However,
the real growth rate of government expenditure is not provided by the Bank of Korea Economic
Statistics System. Thus, you could redefine government expenditure (G) as the government
consumption only and investment (I) as gross fixed capital formation by both private sector and
government.
Also note that we do not need seasonal adjustment for annual data since there is, by definition, no
seasonality across years.
Here are contributions of each component on real GDP growth. Find that the sum of contributions equals to
the real growth rate (Y = C + I + G + X – IM).
c) See negative relationship between annual unemployment rates and real GDP growth rates. As these time
series are already in comparable units, you don’t necessarily need to transform these values. You could use
quarterly real GDP rates calculated as the growth rate from the previous quarter, where real GDP is
seasonally adjusted. In this case, then you need to use seasonally adjusted unemployment. Correlation
coefficients can be calculated using “correl” function in Excel. See if whether this relationship was
pronounced during two crises.
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Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
9 4.5
8 4
7
3.5
6
3
5
4 2.5
3 2
2
1.5
1
1
0
2007
2016
2001
2002
2003
2004
2005
2006
2008
2009
2010
2011
2012
2013
2014
2015
2017
2018
2019
2020
2021
2022
-1 0.5
-2 0
Real GDP Growth Rate (%, Left Axis) Unemployment Rate (%, Right Axis)
Here are correlation coefficients calculated using Excel for full sample years (2001-2022), around 2008
global financial crisis (2007-2010), and Covid-19 crisis (2020-2022). Note that crisis periods are very
short, meaning that correlation coefficients for these periods might not be reliable. We observe that real
GDP growth and unemployment rates are negatively correlated, although the correlation seems not that
strong. This is consistent with our prediction that more workers are employed during good times. This
correlation had been weakened during the 2008 global financial crisis but strengthened during the Covid-
19 crisis. The pronounced negative correlation during the recent Covid-19 crisis partly reflects the fact that
expansionary fiscal and monetary policy helped boost real GDP growth and there are more discouraged
workers during the crisis who are not counted as unemployed people.
Sample Correlation
Years Coefficient
2001-2022 -0.0915
2007-2010 0.1028
2020-2022 -0.3642
Part 2. Math Review
1. Suppose that the consumer has the following preference.
1
𝑢(𝑐) = −
𝑐
where c > 0 denotes consumption
a) Draw the consumer’s preference with the 𝑢(𝑐) on the y-axis and 𝑐 on the x-axis.
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Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
b) Obtain the first order derivative of 𝑢(𝑐). Does it tell you that utility increases when consumption
increases?
c) Evaluate the values of the first order derivative when 𝑐 = 1 and 𝑐 = 2, respectively. Does it tell
you that marginal utility increases when consumption increases?
d) Obtain the second order derivative of 𝑢(𝑐).
SOLUTION:
a)
1 1
See the graph below. You can plug 𝑐 = 1 into 𝑢(𝑐) = − 𝑐 = − 1 = −1 and find a point (1,-1). Do the
same to get a point (2, -1/2). Connecting points gives you the graph.
b)
The first order derivative is given by
𝜕𝑢(𝑐) 𝜕 − 1/𝑐 𝜕𝑐 −1
= =− = −(−1 × 𝑐 −2 ) = 1/𝑐 2
𝜕𝑐 𝜕𝑐 𝜕𝑐
𝜕𝑢(𝑐)
𝑐 > 0 implies that = 1/𝑐 2 > 0. Thus, yes, utility 𝑢(𝑐) increases when consumption 𝑐 increases.
𝜕𝑐
c)
𝜕𝑢(𝑐) 1
Plug 𝑐 = 1 into the first order derivative: = =1
𝜕𝑐 𝑐2
𝜕𝑢(𝑐) 1 1
Plug 𝑐 = 2 into the first order derivative: = 𝑐2 = 4
𝜕𝑐
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Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
𝜕𝑢(𝑐)
No, it shows that marginal utility decreases from 1 to 1/4 when consumption 𝑐 increases from 1 to 2.
𝜕𝑐
Graphically, we can see that the slope evaluated at a point (1,-1) is 1 and the slope at a point (2,-1/2) is 1/4.
d)
The second order derivative is given by
1
𝜕2 𝑢(𝑐) 𝜕 2 𝜕𝑐 −2 2
= 𝑐
= = −2 × 𝑐 −3 = − 𝑐3 < 0
𝜕𝑐𝜕𝑐 𝜕𝑐 𝜕𝑐
where you take the derivative of the first order derivative and 𝑐 > 0.
𝜕𝑢(𝑐)
The negative sign of the second order derivative shows that marginal utility decreases
𝜕𝑐
when consumption 𝑐 increases.
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Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
2. Suppose that the consumer has the following preference.
1 1 2
𝑢(𝑐1 , 𝑐2 ) = (𝑐12 + 𝑐22 )
where 𝑐1 > 0 and 𝑐2 > 0 denote consumption of good 1 and good 2, respectively.
1 1
a) Obtain the first order derivative of 𝑢(𝑐1 , 𝑐2 ) with regard to 𝑐1 [Hint: Set 𝑥 = 𝑐12 + 𝑐22 and use the
𝜕𝑢(𝑐1 ,𝑐2 ) 𝜕𝑢(𝑥) 𝜕𝑥
chain rule: = ]. Does it tell you that utility increases when consumption 𝑐1
𝜕𝑐1 𝜕𝑥 𝜕𝑐1
increases?
b) Evaluate the value of the first order derivative when 𝑐1 = 1 and 𝑐2 = 2.
c) Evaluate the value of the first order derivative when 𝑐1 = 2 and 𝑐2 = 2. Compare this value with
the value obtained in b). Does it tell you that marginal utility increases when consumption
𝑐1 increases?
d) Obtain the second order derivative of 𝑢(𝑐1 , 𝑐2 ) with regard to 𝑐1 .
SOLUTION:
a)
1 1
Let 𝑢(𝑐1 , 𝑐2 ) = 𝑢(𝑥) = 𝑥 2 , using 𝑥 = 𝑐12 + 𝑐22
Then, the first order derivative of 𝑢(𝑐1 , 𝑐2 ) with regard to 𝑐1 can be written as
𝜕𝑢(𝑐1 , 𝑐2 ) 𝜕𝑢(𝑥) 𝜕𝑥
=
𝜕𝑐1 𝜕𝑥 𝜕𝑐1
where the chain rule is used.
Notice that
𝜕𝑢(𝑥) 𝜕𝑥 2
= = 2𝑥
𝜕𝑥 𝜕𝑥
1 1 1
𝜕𝑥 𝜕( 𝑐12 + 𝑐22 ) 𝜕𝑐12 1 −12
= = = 𝑐
𝜕𝑐1 𝜕𝑐1 𝜕𝑐1 2 1
where 𝑐2 is fixed (treated as a constant) when evaluating the partial derivative.
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Fall 2024, Macroeconomics I
Jun Hee Kwak, Sogang University
By combing the above two equations, we get
𝜕𝑢(𝑐1 , 𝑐2 ) 𝜕𝑢(𝑥) 𝜕𝑥 1 −1 𝑥 √𝑐1 + √𝑐2 𝑐2
= = 2𝑥 × 𝑐1 2 = = =1+√ >0
𝜕𝑐1 𝜕𝑥 𝜕𝑐1 2 √𝑐1 √𝑐1 𝑐1
where 𝑐1 > 0, 𝑐2 > 0
Yes, utility 𝑢(𝑐1 , 𝑐2 ) increases when consumption 𝑐1 increases, as suggested by the sign of the (partial)
first order derivative.
b)
Plug 𝑐1 = 1 and 𝑐2 = 2 into the first order derivative:
𝜕𝑢(𝑐1 = 1, 𝑐2 = 2) 2
= 1 + √ = 1 + √2 ≈ 2.414
𝜕𝑐1 1
c)
Plug 𝑐1 = 2 and 𝑐2 = 2 into the first order derivative:
𝜕𝑢(𝑐1 = 2, 𝑐2 = 2) 2
=1+√ =2
𝜕𝑐1 2
𝜕𝑢(𝑐1 ,𝑐2 )
Marginal utility decreases from 2.414 to 2 when consumption 𝑐1 increases from 1 to 2 given 𝑐2 = 2.
𝜕𝑐1
d)
Recall the first order derivative:
𝜕𝑢(𝑐1 , 𝑐2 ) 𝑐2
= 1+√
𝜕𝑐1 𝑐1
The second order derivative of 𝑢(𝑐) with regard to 𝑐1 is given by
1 1 1
𝑐 − − −
𝜕 (1 + √𝑐2 ) 𝜕 (1 + √𝑐2 𝑐1 2 ) 𝜕 (√𝑐2 𝑐1 2 ) 𝜕 (𝑐1 2 )
𝜕 2 𝑢(𝑐1 , 𝑐2 ) 1 1 −3
= = = = √𝑐2 = √𝑐2 × (− 𝑐1 2 ) < 0
𝜕𝑐1 𝜕𝑐1 𝜕𝑐1 𝜕𝑐1 𝜕𝑐1 𝜕𝑐1 2
𝜕𝑢(𝑐1 ,𝑐2)
The negative sign of the second order derivative shows that marginal utility 𝜕𝑐1
decreases when
consumption 𝑐1 increases given the same level of 𝑐2 .
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