This preview shows pages 1–3. Sign up to view the full content.
1
Econ 301
S.L. Parente
Fall 2003
Problem Set #1
Do Questions 16 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.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document2
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)
This is the end of the preview. Sign up to
access the rest of the document.
 Winter '08
 Miyanishi

Click to edit the document details