chapter_2_problem - Problems 1 Product accounting adds up...

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Problems 1. Product accounting adds up value added by all producers. The wheat producer has no intermediate inputs and produces 30 million bushels at $3/bu. for $90 million. The bread producer produces 100 million loaves at $3.50/loaf for $350 million. The bread producer uses $75 million worth of wheat as an input. Therefore, the bread producer’s value added is $275 million. Total GDP is therefore $90 million + $275 million = $365 million. Expenditure accounting adds up the value of expenditures on final output. Consumers buy 100 million loaves at $3.50/loaf for $350 million. The wheat producer adds 5 million bushels of wheat to inventory. Therefore, investment spending is equal to 5 million bushels of wheat valued at $3/bu., which costs $15 million. Total GDP is therefore $350 million + $15 million = $365 million. 2. Coal producer, steel producer, and consumers. (a) (i) Product approach: Coal producer produces 15 million tons of coal at $5/ton, which adds $75 million to GDP. The steel producer produces 10 million tons of steel at $20/ton, which is worth $200 million. The steel producer pays $125 million for 25 million tons of coal at $5/ton. The steel producer’s value added is therefore $75 million. GDP is equal to $75 million + $75 million = $150 million. (ii) Expenditure approach: Consumers buy 8 million tons of steel at $20/ton, so consumption is $160 million. There is no investment and no government spending. Exports are 2 million tons of steel at $20/ton, which is worth $40 million. Imports are 10 million tons of coal at $5/ton, which is worth $50 million. Net exports are therefore equal to $40 million $50 million = $10 million. GDP is therefore equal to $160 million + ( $10 million) = $150 million. (iii) Income approach: The coal producer pays $50 million in wages and the steel producer pays $40 million in wages, so total wages in the economy equal $90 million. The coal producer receives $75 million in revenue for selling 15 million tons at $15/ton. The coal producer pays $50 million in wages, so the coal producer’s profits are $25 million. The steel producer receives $200 million in revenue for selling 10 million tons of steel at $20/ton. The steel producer pays $40 million in wages and pays $125 million for the 25 million tons of coal that it needs to produce steel. The steel producer’s profits are therefore equal to $200 million $40 million $125 million = $35 million. Total profit income in the economy is therefore $25 million + $35 million = $60 million. GDP therefore is equal to wage income ($90 million) plus profit income ($60 million). GDP is therefore $150 million. (b) There are no net factor payments from abroad in this example. Therefore, the current account surplus is equal to net exports, which is equal to ( $10 million). (c) As originally formulated, GNP is equal to GDP, which is equal to $150 million. Alternatively, if foreigners receive $25 million in coal industry profits as income, then net factor payments from abroad are ( $25 million), so GNP is equal to $125 million. 3. Wheat and Bread (a) Product approach: Firm A produces 50,000 bushels of wheat, with no intermediate goods inputs. At $3/bu., the value of Firm A’s production is equal to $150,000. Firm B produces 50,000 loaves of

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