Answer to Question #173863 in Macroeconomics for innocent kampumba

Question

Question 2

a. Henry L. Moore’s early work established him as a leader in integrating statistical methods  with economics. Kindly outline how he developed interest in J. B. Clark’s marginal  productivity theory of wages. State the implications of Clark’s Theory. Briefly explain how  he positively contributed to the development of Macroeconometrics?

b. Briefly explain Moore’s Demand Curve and the Identification Problem. Hint: Use graphs  to earn extra marks

c. Henry Schultz’s (1893-1938) contribution came as a derivative of his analysis of tariffs,  which required him to estimate a demand curve. Will you please explain the interesting  discovery of Henry Schultz about Independent and Dependent variables?

d. W.S. Jevons (1835-1882) was one of the pioneers in mathematical techniques and utility  theory. For that work he was highly lauded. Can you please explain his sunspot theory?

Answer 1

A]

Henry Moore developed interest in Clark’s marginal productivity theory of wages when He discovered that the price of labor, wage rate, is determined according to the marginal product of labor. 

Employer will employ labor up to the point until market wage equals labor’s value of the marginal product and marginal revenue product. This meant that/ implied that  for it to work perfect competition prevails in products market and in labor market, the firm aims at profit-maximization, resources are fully employed, all laborers are homogeneous and are divisible, labor is mobile and is substitutable to capital and other inputs.

He contributed to macro econometrics in a sense that the correlation can be assigned values and hence future forecasts on economic growth can be made.

B] Assume that supply and demand determine market prices. The equations for the production and consumption functions are what we're looking for. However, the equation obtained by regressing quantity on market price cannot be classified as either the demand or supply function. In some cases, correlation can be used to obtain either the demand or supply function, but not both. Assume the supply function is subject to random changes if the demand function remains constant. The demand curve will then contain the price and output equilibrium points, and a regression of quantity on price will yield the demand function. If the demand function remains constant, assume the supply function is subject to random changes. The price and output equilibrium points will be found on the demand curve, and the demand function will be obtained by regressing quantity on price. But when both the demand and supply curve are subject to random fluctuations the regression of output on price is neither the demand curve nor the supply curve.

The Identification Problem in econometrics is the ability to solve for unique values of the structural model's variables from the values of the reduced form of the model's variables. The endogenous variables are defined as functions of the exogenous variables in the simplified form of a model.

If the reduced form coefficients are compatible with many different values for the structural coefficients then the model is said to be under identified. If generally it not possible to find any values of structural coefficients that are compatible with the reduced form coefficients then the model is said to be over identified. If one and only one value of each structural coefficient is compatible with the reduced form coefficients the model is said to be just identified or exactly identified.

 

C] Change in independent variables will lead to change in dependent variables by a certain margin up to a given level .For example, originally tested the theory that marginal cost  the addition to total cost  resulting from an increase in output first declines as production expands but ultimately begins to rise. Econometric studies, however, indicate that marginal cost tends to remain more or less constant.

D] The word "sunspots" in economics refers to an extrinsic random variable, or one that has no bearing on economic fundamentals. A sunspot may or may not have a rationally apparent relationship to the economy. In econometric modeling, a variable characterized as a sunspot would be considered an irreducible random variable.

Sunspots are psychological and social factors such as investor sentiment, aspirations, and responses to non-economic events. These variables were given the name sunspots since some economists thought there was a link between real sunspots and economic strength in the past.

Sunspots in economic systems sometimes represent social or psychological factors that impact financial decisions in addition to fundamental issues like market forces, prices, and consumption patterns.

 For example intrinsically unpredictable variables are those variables that are expected to affect a country's GDP, such as workforce participation, efficiency, consumer spending, and price. These variables are shown to have a direct impact on GDP. Extrinsic probability distributions, or sunspots, are variables that do not have a direct relationship to GDP. A sunspot, for example, could be used to represent a forthcoming national election.