Previously posted are the outlines, readings, and exams for Domar’s national income and employment courses taught at the University of Chicago in 1948 and at M.I.T. in 1965. Also of interest here are the MIT student evaluations for this and other core theory courses in the late 1960s.
There is little doubt in my mind that MIT economics graduate students during the first term of the 1968-69 academic year responded to Evsey Domar’s attempts to get them interested in the details of national income and product accounting and productivity indexes with an enthusiasm to rival the high-school kids’ reaction to the Hawley-Smoot lesson attempted by a high-school teacher in the cult-film Ferris Bueller’s Day Off.
Fun-fact: the boring teacher in the movie was played by Ben Stein, son of economist, Herbert Stein. One more piece of fun: watch an older Ben Stein talk about getting that role.
In Domar’s defense, national accounting and index numbers have never been the stuff of a great TED talk. Anyone? … Anyone?
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THE THEORY OF INCOME AND EMPLOYMENT
14.451
E. D. Domar
MIDTERM EXAMINATION
November 27, 1968
Seventy-five minutes
Please answer all questions. Note their weights. Use a separate book for each question.
- [30%] “One of the basic defects of the American economic system lies in the presence of a large number of persons who receive legal incomes and yet perform no useful services. The inclusion of their incomes in the national income total (according to accepted methods) undoubtedly exaggerates this total.”
Discuss this statement carefully. Distinguish different kinds of income and different sources. In each case indicate how national income (or product) will be affected if these persons were employed productively. (What does “productively” mean in this context?) - [30%] In national income comparisons between the Soviet Union and the U.S. (or other pairs of less developed and advanced countries) it is usually thought that existing methods of social accounting understate the ratio of Russian to American income, particularly if official rates of exchange are used for conversion.
- Evaluate this statement critically and indicate whether or not you agree with it and why.
- Suppose the comparison was made first in Russian prices (for both countries) and then in American prices (again for both countries). Which one should give the Russians a more favorable ratio and why? (Hint: consider comparisons over time in the same country.)Note: Disregard the complexities of the Russian price system: remember that the Russian ruble is not freely convertible into other currencies.
- [25%] a. What role or roles does the so-called “Money Illusion” play in the Classical and Keynesian systems?
b. If a country is suffering from inflation, will an increase in output brought about by the reduction in unemployment (assuming that it existed) intensify or reduce the inflation? Why? (Hint: this is not an easy question; consider carefully the nature of output to be produced.)
- [15%] If you wanted to measure labor or other factor productivity would you or would you not use the Federal Reserve Index of Industrial Production? Why or why not?
Source: Duke University. David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archives. Evsey D. Domar Papers. Box 17, Folder “Macroeconomics Examinations (1 of 3)”.
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THE THEORY OF INCOME AND EMPLOYMENT
14.451
E. D. Domar
FINAL EXAMINATION
Jan. 28, 1969
Three hours
Please answer Question 1 and any FOUR out of the five remaining questions. Use a separate book for each question.
- [24%] An overheard argument among students in 14.451 about measures required to increase investment:
Student A: Increase the quantity of money in order to reduce the rate of interest.
Student B: No, an increase in the quantity of money will merely raise prices.
Student C: A fall in the rate of interest will not have any appreciable effect on investment in any case.
Student D: A fall in the rate of interest will reduce savings, and thus reduce rather than increase investment.
Student E: To increase investment we should increase savings by increasing income inequality.
Student F: On the contrary, greater income equality will increase savings.
Student G: You are both (That is, E and F) wrong: the fraction of income saved is independent of income distribution and of the size of a person’s income.
Student H: To increase investment we should increase demand by increasing consumption and thus reducing saving.
Student I: Nothing will help unless you reduce the prices of machinery and construction.
Student J: You (that is, Student I) are wrong: your suggestion will merely reduce the amount of investment.
Please set this poor, confused group straight (if you can). In so doing, explain clearly the assumptions and conditions implied in each statement and evaluate it critically. Try to identify the opera (and its author) from which each aria is taken. How would you go about increasing investment?
- [19%] “Thus the rate of interest is what it is because it is expected to become other than it is; if it is not expected to become other than it is, there is nothing left to tell us what it is…”
- Can you identify the author of this famous statement?
- Can you recognize whose interest theory he referred to?
- Explain and evaluate that theory critically.
- Present your own (original or otherwise) theory of interest.
- [19%] a. Assume that all expenditures on education and training, both private and public, are to be treated as investment. Explain the modifications that you would make in existing methods of national income, (and product) and wealth accounting and the reasons for these changes.
b. In computing national product, each commodity (or service) is multiplied by its price in order to compute the total. What is the rationale for this method? What assumptions is it based on? Are these assumptions realistic?
- [19%] Suppose Project I has a higher internal rate of return, while Project II has a larger discounted value. Assume that the projects are mutually exclusive, and that both are being considered by a private firm.
- Explain the rationale of each method and the assumptions it is based on.
- Which method (that is, the internal rate vs. present value) would you use under what conditions and why?
- How will your calculations be changed if the projects are undertaken by a government of some underdeveloped country?
- [19%] a. “A high ratio of depreciation to investment is a sign of old age.”
b. “If the measured distribution of income remained the same in the U.S. over the last fifty years, the distribution of permanent income has become less equal.”
Comment. Explain your conclusion thoroughly.
c. “If the Balanced-Budget Theorem is correct, is Say’s Law also correct?”
Comment. Explain what is meant by each part of this statement.
- [19%] a. “What is the proper definition of money required in the Price-Flexibility (Patinkin-like) problems? Why and how does it differ from the usual definition?
Explain what elements of American money supply and of other relevant assets you would include or exclude in the proper (for this purpose) definition of money.
b. Explain how Patinkin’s conclusions regarding the effects of an increase (say, of doubling) in the quantity of money “by magic” on the price level and on the rate of interest are modified by the existence of the money illusion in the labor market.
c. Assume the absence of money illusion and explain why the effects of creating money by open market operations differ from those when money is created “by magic.”
Source:Duke University. David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archives. Evsey D. Domar Papers. Box 17, Folder “Macroeconomics Examinations (2 of 3)”.
Image Source: Evsey D. Domar at the MIT Museum.