Intermediate Macroeconomics

Homework 1 Concepts and Definitions 

A. Each year, firms lose output and profits due to employee's sickness and breaks. Employees' that are sick has lower productivity. Is arguing that healthy workers will decrease the number of days employees are absent due to illness and as a consequence output and productivity will increase.

1. Do you agree or disagree with this statement, explain why.

This is absolutely true based on the earlier statement made that "Each year, firms lose output and profits due to employee's sickness and breaks. Employees' that are sick has lower productivity". Employees who are sick require time to rest and get the necessary medical attention from doctors, this will affect the number of days they are present at work. Even when they attend work they work at slower rates or are there just to show presence without working since they don't feel well; this greatly affects their productivity. When employees are healthy they will regularly attend to their duties and they do so without any difficulties of body uneasiness this increases output and productivity. They will not require time to seek medical attention thus the number of days they will not decrease. There are factors that can influence employee output and productivity even when they are not sick such as; their attitude towards work, the supervision styles, presence of necessary equipment, and employer's means to boost their morale. Holding such factors constant then healthy employees decrease the number of days they are absent due to illness and as a result increase output and productivity.

2. What are the consequences and secondary effects if any if all firms are required by law to provide health care benefits?

Mandatory provision of health care will definitely have its negative and positive effects to firms, to begin with if the health care system is not properly structured it will lead to discriminating against small and large firms. This is because firms that have lesser employees will be taxed more due to expenses such as; fixed administrative costs, adverse selection, and broker fees. This will lead to lower profits and lesser pay for the employee due to the tax. A tax system that is well structure will not discriminate but will still impose taxes that will translate to reduced taxes for all firms.

The benefits of such a system is that there will be improved health to the employees i.e. even those who are earn low income for this reason absenteeism will be reduced and work output and productivity increased leading to higher profits.

3. Does the government should provide a national health care program for all employees? What are the secondary effects of the program? 

The government should play a leading role in providing health care to its citizens however the citizens are the ones who intern pay for the programs through taxes from their income. The government is therefore required to provide a health care program to its citizens so as to ensure the workers stay health and productive, questions are however raised on competency of the government providing an effective system that will work without negatively affecting quality of health care and costs. There should be a standardized health care plan for all people to benefit but if the government introduces other programs then due to supply and demand then the prices may go up to reduce the demand for healthcare. The doctors in public hospitals will have an increase in patients since the government is paying for it.

The government may also result to go for the lowest bidders which will affect healthcare negatively in terms of quality. The prices will be fixed for services and the government will have to look for more money to pay the doctors. When the prices are fixed more qualified doctors who charge more money will have no patients but the other less qualified will be overwhelmed with workload and thus enjoying the business this will reduce quality.

Fixing prices on the other hand would mean that patients will be treated by experienced doctors leaving the less experienced out of the picture. This means that there will be increased costs of treatment since new doctors will have no experience. Economically if the government is to provide a healthcare program then enough funds must be set to avoid affecting costs or quality of the healthcare. But such a program if effective it will ensure a healthy productive nation.

4. Which health program should be better for workers, one provided by the firm or one provided by the government and finance through a special health tax?

A health program provided by the firm would be more economical to the worker since the employer will factor in special costs in the program while that provided by the government will be general and may be overtaxing to the worker. The government program may be mismanaged and influence politically which may make it fail or have negative effects such as higher costs and lower quality of healthcare.

B. Use of the W/P = MP of Labor

1. The following information is given about an industry: a) the price of their goods has decrease due to foreign competition, b) some companies are considering moving to other countries to decrease their cost, and c) the firms and the labor unions are asking the government to limit foreign competition and to provide some form of subsidy to save the local jobs.

a. How would you use the course formulas to analyze the problem?

For a production function to produce maximum output there has to inputs in the process including a specified state of technology labor, human capital, natural resources, and physical capital (assets). The firms in this case have the factors of production high that it cannot produce at optimum and accumulate profits and also is threatened with completion from other foreign countries. It means that when producing in other countries the factors may be cheaper hence the companies are able to sell their products at lower prices. If the companies move to other countries to produce there the labor market will be highly affected since jobs will be lost and labor will be in high supply and low demand. For labor the marginal product of labor needs to be checked i.e. it remains equal to wage rate so that both the workers and the firm do not overexploit each other. For labor it must be checked so that its marginal product is equal to the marginal revenue so that the employees remain protected for employer's explotation.

b. What policies would you suggest to save the local jobs?

The government should give subsidies to the companies to help them reduce their cost of production which will enable the firms be competitive. The government should also control entry of other companies to this industry so that those companies venturing in it are protected from foreign competition; this can be regulation of taxes and other levies.

Investing in training so that the firms can have qualified personnel to work in their firms will be important since it may be the factor making the cost of production to be high. The skilled may be charging high wages that the industry cannot manage to pay and still remain competitive.

2. How do the following events will affects the MP on labor:

a. An energy crisis

An energy crisis will result to the company cutting back on its usage of energy, this result to reduction of the marginal product of labor. This is because the company may be cutting production by reducing input in labor since the other entire factor such as assets and technology are not affected.

b. An improvement on firms' organization

An improvement on firm's organization will lead to an increase of marginal product of labor since the firm would require other staff and skilled workers to handle the improvement this would translate to an increase in MP of labor.

C. Definitions  And Concepts

1. For each of the following kinds of risk give the definition, and what factors/events contribute to each one.

a. Interest Rate Risk

An interest rate risk is a risk that faces an investment where the interest rates of the investment may ascend and lead to a lower market value of the investment. It affects long term fixed securities including bonds, loans, and preferred stocks. This risk is brought about by variability of interest rates with time. For banks four types of interest rates risk affect them, these are basis, yield curve, repricing, and option risks.

b. Systemic Risk

This is an operational risk which risks the disintegration of the entire financial structure or complete market. It is contributed by a system that is not financially stable, or catastrophes hitting the market or ideological factors that assume firms are too big to fail or too interconnected to fail. It leads to bankruptcy of the institution due to failure of either a single entity or entire entities of the institution.

c. Liquidity Risk

This is the risk where a security cannot be converted to cash or traded in the markets fast enough to avoid losses or attain its original cost or break even. This can be identified as asset liquidity risks or funding liquidity risks. The risk is caused by reduced interest of buyers in the market where no one wants to buy the asset. Lack of a buyer doesn't necessarily mean low value of the market but just there is no interest in buyers or difficulty in finding a buyer. This is common in emerging markets or markets with low volumes.

An asset liquidity risk is established when bids and/or offers spread widely, there are explicit liquidity reserves, longer holding time for VaR computations. The funding liquidity risk is common when liabilities are not met in time, when they only fetch an uneconomic price, have a systemic or name-specific.

d. Default  Risk

This risk affects companies that lend and borrow in that the lender stands a chance of being unable to pays the required payment to clear his debt. This is only caused when companies lend or borrow finances. To minimize the default risk lenders increase the rates of return for high debt levels.

e. Exchange Rate Risk

Exchange rate risk is the risk that faces a firm's investments due to a change in the exchange rates. This may result from investing in foreign currency dictated investments such as shares listed in other nations or bonds in international trading. Also companies that have invested in other companies or dealing with imports and exports or operations across borders are faced by this risk.

Country risks are those that face an investor when investing in a country, factors that affect the business in that country bring a set of risks that in turn affect the business. These include; the business environment, political stability, regulation, and devaluation effects. This affects any business that invests in that country whether small, medium or large.

2. What is: 1) securization, 2) Financial accelerator, leverage ratio, and maturity trasformation,

Securitization is a process that is structured to distribute risks by collecting assets in one pool and issuing new securities based on the assets and the cash flow they have. These securities are issued to investors who are willing to share the risks and benefits from these assets.

Financial accelerator is a term used to refer to the resultant worse economic conditions in a country due to numerous shocks from financial markets, i.e. the real economy and financial markets adverse conditions reinforce each other resulting to economic crisis/crunch.

Leverage ratio is the ratio that is applied to measure the operating costs of a firm and how operating income will be affected by output. They are the ratios used to establish financial leverage of a firm so as to know the firm's ways of financing or the means the firm is to meet its financial obligations.

Maturity transformation is a state where firms have the capability to borrow money in the short term so as to invest in long-term projects. Banks are the more effective in maturity transformation.

3. What are intangible assets? How do they affect I, R/D, Tech. and the measurement of GDP? How intangible assets do affects the market value of stocks?

Intangible assets are those that cannot be touched and are not physical, they are mainly created in the course of time and effort and include; customer loyalty, copyrights, trademarks patent rights, knowhow, leverage activities, structural events, and goodwill.

Any firm invests a lot in research and development inorder to establish new intangible assets so as to have a competitive advantage over their competitors. The intellectual property law protects research and development efforts from other firms. In the process of research new technology is developed so as to be more competitive.

In view of the fact that intangible assets cannot be physically measured then appearing in balance sheets is difficult this means that most are never included in the GDP calculation yet they are involved in creating the GDP. Most firms have invested in these assets to ensure long term economic value.

D. Economic Models

Describe the process to do an economic model.

An economic model is a theoretical representation of an economic process guided by a set of variables, logic and a quantitative link among them. Since they include ideas the first step involves getting a good idea, one must gather all the information required from general talk, magazines, and even documentaries. This idea must be worth pursuing. Most models look similar since it involves economic agents making choices to advance objectives. The choice made must address the constraints and they must be consistent; these choices must be unique since the give the model originality. Using different examples that would include choices of solving the problems, one can work out the end product of the model and this will help identify interesting occurrences, this will from the model; one should try to keep it simple as possible to avoid complications. Next is to generalize the model to include interesting and special ideas but mistakes and errors should avoided through moving back and forth the process. This will enable one to establish all the links in the variables, logical ideas and quantitative information to make the model work as expected. Confirming from literature would be appropriate so that one can identify other similar models or help add to the ideas developed.