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# PS 1 with answers - METU Department of Economics Econ 202...

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1/6 METU Department of Economics Econ 202 Macroeconomic Theory Spring 2010 Problem Set 1 with Answers Q.1 Consider an economy with three companies A, B, C. Company A produces cardboard, which is used by Company B to produce boards and cards, which is used by Company C to produce board games. Company A’s revenues (from sales to Company B) amount to 100 TL, and its expenses on labor amount to 30 TL. Company B’s revenues amount to 250 TL, while its expenses on labor amount to 80 TL. Company C’s revenues amount to 400 TL, while its expenses on labor amount to 90 TL. Show three different ways to compute this economy’s GDP. GDP = Value of final goods produced = Revenues of Company C = 400 TL GDP = Value added = 100 + (250 - 100) + (400 - 250) = 400 TL GDP = Sum of incomes = Incomes from labor + Incomes from profits= (30 + 80 + 90) + [(100 - 30) + (250 - 100 - 80) + (400 - 250 - 90)] = 400 YTL Q.2 Suppose that the country of Macronia has three industries: bananas, tires, and cars. (Macronia is a closed economy, both with respect to capital and goods flows.) Macronia's population is 10,000. Bananas are produced by independent farmers, and the country produces 17 million bananas in a year, all of which are consumed by Macronia's banana-loving households. Tires are made by independent entrepreneurs from worthless junk. The total value of tires produced in a year is 38 million TRY. These tires are in turn purchased entirely by Macronia's car assembly plant. The car assembly plant turns out 62 cars a year, hiring workers and paying a total of 10 million TRY per year in wages. The market price of a car is 3 million TRY and the market price of a banana is 2 TRY. a) Calculate Macronia's GDP using the final sales definition of GDP. GDP=final sales=Final sales of bananas + cars =17x2+62x3=220 million YTL. Remember that tires are intermediate goods, and so are not counted in the final sales/expenditure approach. b) What is Macronia's GDP per capita? 220,000,000 / 10,000=22,000 YTL c) Compute value-added in each industry, and in the economy as a whole. Does your answer make sense? Why? Bananas= 34,000,000 YTL, Tires= 38,000,000 YTL Cars = wages+ capital income = 10,000,000 + 138,000,000 = 148,000,000 YTL (Alternatively = revenue - intermediate purchases = 186 million - 38 million = 148 million YTL). Thus, value added in all sectors sums to 220 million YTL. That makes sense because GDP based on final sales was 220 million YTL and GDP computed under the final sales approach should be equal

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2/6 to GDP computed under the value added approach. Q.3 There is an error in the question. It is cancelled. Q.4 In Orangeland, a closed economy, Orangelanders live only on orange juice. There is a farm that produces oranges and a factory that produces Orange Juice (OJ). In 2006, the orange farm produced 10 oranges, and sold them to the orange juice company at 1 TL each. The orange juice company produced 3 bottles of orange juice, and sold them all at a unit price of 10 TL plus 10% indirect tax collected by government (so the price paid was actually 11 TL). The orange farm paid total wages of 6 TL. The orange juice company paid total wages of 10 TL. Both companies retained 50% of their net profits and paid the
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