homework1spring2005 - Economics 302 Prof Kelly Problem Set...

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Economics 302 Prof. Kelly Problem Set 1 Due: Wednesday, February 2 Exercise 1 Income=Expenditure In 2.1 of Mankiw, he gives an example of how GDP can be calculated as the total expenditure in an economy or the total income. Regardless of the method of calculation, the answer must be identical, whatever one consumer spends, another individual must put in the cash register. In any macroeconomic model, income equaling expenditure is a fundamental property of an equilibrium. The purpose of this question is three-fold. First, it hopes to demonstrate how macroeconomists use this equilibrium condition in other settings. Second, it provides some early practice using notation. Third, it o¤ers the opportunity to test the conclusions of a model using macroeconomic data. Suppose there are two countries in the world, "Home" and "Foreign". They produce n goods which are just given numbers: f 1 ; 2 ; 3 ;:::;n g : Home will produce all goods with a number k and below while foreign will produce all goods with a number greater than k: Suppose that every individual in both Home and Foreign will consume some of every good regardless of where it is produced and that regardless of how much income any individual in Home or Foreign possesses, they always spend a …xed percentage of their income on each
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homework1spring2005 - Economics 302 Prof Kelly Problem Set...

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