Department of Economics
Econ 202 Macroeconomic Theory
Problem Set 1 with Answers
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
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.
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.
What is Macronia's GDP per capita?
220,000,000 / 10,000=22,000 YTL
Compute value-added in each industry, and in the economy as a whole.
Does your answer make
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