# ECN PS1_SOL - Econ 301 Fall 2003 Problem Set#1 S.L Parente...

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1 Econ 301 S.L. Parente Fall 2003 Problem Set #1 Do Questions 1-6 in Williamson pages 62 and 63, plus the additional 4 questions. 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 \$40 million in wages and the steel producer pays \$50 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 \$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.
2 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.