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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)

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