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.