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PS_1 - METU Department of Economics Econ 202 Macroeconomic...

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1 METU Department of Economics Econ 202 Macroeconomic Theory Instructors: Şirin Saraçoğlu Ebru Voyvoda 2010-2011 Spring Semester Problem Set 1 Question 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. Question 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 b) What is Macronia's GDP per capita? c) Compute value-added in each industry, and in the economy as a whole. Does your answer make sense? Why? Question 3: Compute the GDP and its components as measured by expenditure, income and production in each case given below. For the production side, make sure you compute value-added for each firm. Make sure that you arrive at the same number with each way

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