Exercise 1 In macroeconomics there are two questions that serve as foundation to any subsequent analysis: 1) how to measure (real) output growth? and 2) how is growth connected to wellbeing? As for the first question, there are three ways that can be done, starting with the basic definition of percentage difference between two numbers, say x1 compared to x0 when there is only one good (e.g. apples).

For the economy as a whole, the focus is on real GDP growth, which holds prices constant on a given year (base year) then apply them before, during, and after that year in order to calculate the total dollar value of all goods and services produced (i.e. we need prices to add up real quantities in dollar terms). In this exercise you will work out the connection between the three ways to measure GDP growth: 1. As a percentage change holding prices constant. 2. Expressing growth in terms of a common item (converting everything into a particular good (e.g. apples). And 3. as the weighted average of the growth in each of the goods weighted by their expenditure shares. The second question in macroeconomics refers to a mapping from goods and services to subjective well‐ being. Yes, there is a way.

Work out the algebraic steps to: (1) go from the first to the second equation in slide 14; (2) from that same top equation in slide 14 to the one in slide 15; and (3) show the relationship in slide 16.


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