Econ416PS1_Answers - Theory of Economic Development Econ...

This preview shows pages 1–3. Sign up to view the full content.

Theory of Economic Development Econ 416, Spring 2010 Problem Set 1 – Answer Key NOTE: Please provide short answers to each question in the space provided! 1. Country A produces only three goods: potatoes, vodka, and haircuts. (a) Suppose that all potatoes are used for the production of vodka. What is the total production of Country A? Value added in potato industry: 100*4 = 400 million rubles Value added in vodka industry: 40*20 - 100*4 = 800 - 400 = 400 million rubles Value added in haircut industry: 50*10 = 500 million rubles Notice that in computing the value added in the vodka industry, we subtracted the cost of the potatoes used as an input. In any event, summing the value added from each industry we get a total production of: 400 + 400 + 500 = 1300 million rubles. (b) Now suppose that a technological innovation allows vodka to be produced without the use of potatoes! So the quantity of potatoes produced remains unchanged, but now they are consumed as final goods rather than being used as an input for vodka. What is the revised total production for Country A? Value added in potato and haircut industry are the same. But since potatoes are no longer used as an input in the production of vodka, it is no longer to subtract the cost of potatoes when computing the value added of the vodka industry: Value added in vodka industry: 40*20 = 800 million rubles So summing the value added from each industry, we now get a total production of: 400 + 800 + 500 = 1700 million rubles. Country B produces the same goods, but the quantities and prices differ: (c) Continuing to assume that all goods are final goods (i.e., that potatoes are not used

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
as an input in the production of vodka) and given the quantities and prices that prevail in Country B, what is the total production of Country B? Value added in potato industry: 150*2 = 300 million hryvnias Value added in vodka industry: 20*10 = 200 million hryvnias Value added in haircut industry: 60*10 = 600 million hryvnias Summing the value added from each industry we get a total production of: 300 + 200 + 600 = 1100 million hryvnias. (d) Of course, the production of Country A (your answer to part b) is valued in rubles while the production of Country B (your answer to part c) is valued in hryvnias. If we want to compare these two numbers, we’ll need to get them into a common currency. Suppose that the exchange rate between these two currencies is 2 rubles per hryvnia.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 5

Econ416PS1_Answers - Theory of Economic Development Econ...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online