Midterm #1 Review

Midterm #1 Review - University of California, Riverside...

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University of California, Riverside Econ 103A Macroeconomic Theory Winter 2008 Review Problems Chapter 2 1. Measuring Economic Activities Question 1 (Long Question) There are two companies in this economy: Company A and B. Company A owns a farm and produces milk. It sells its product to Company B and the public. Company B produces cheese. It sells its products to the public only. The following table shows the transactions of each business during a year. In particular, Company B cannot sell all the current output to the public. Part of its output is stored as inventory ($15,000). Company A Company B Wages paid to workers $8,000 Wages paid to workers $6,500 Revenue received Milk purchased from Company A $10,000 Milk sold to public $22,000 Revenue received $35,000 Milk sold to Company B $10,000 Inventory Investment $15,000 (a) What is the total amount of output produced by Company B ? Total Output = Revenue received + Inventory Investment = $ 35,000 + $15,000 [Inventory investment is the amount of newly produced goods that are unsold and is thus added to the inventory stock.] (b) What is the value added of Company B ? Value Added = Total Output – Value of Input that is purchased = $35,000 + $15,000 - $10,000 1
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(c) Calculate the total value of economic activity generated by these two businesses by using the Product Approach . [The product approach measures economic activity by summing the value added by all producers.] Value added of Company A = $22,000 + $10,000 Total value of economic activity = $ 22,000 + $10,000 + $35,000 + $15,000 - $10,000 = $22,000 + $35,000 + $15,000 (d) Calculate the total value of economic activity generated by these two businesses by using the Expenditure Approach . According to the expenditure approach, the total value of economic activity is given by the total expenditures made by the end users. We can think of inventory investment as the amount of output purchased by the producer itself. Expenditure on milk and cheese by the public = $22,000 + $35,000 Expenditure on cheese by Company B = $15,000 Total value of economic activity = $22,000 + $35,000 + $15,000 2
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2. Income-Expenditure Identity, GDP & GNP Question 2 (Short Question) Suppose I = 500, G = 60, Export = 30, Import = 50, GDP = 1200. What is C ?
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This note was uploaded on 04/10/2008 for the course ECON 103a taught by Professor Suen during the Spring '08 term at UC Riverside.

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Midterm #1 Review - University of California, Riverside...

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