SOLUTION MANUAL
, This is a solutions manual for A Course in Modern Macroeconomics. Many exercises admit more than one
correct answer; the model answers provided here are just suggestions. If you
nd mistakes or have comments,
let me know at .
3
,
, CHAPTER 1
GDP
Exercises
1.1 Accounting
How does GDP accounting record the following events? For each of them, describe how they would
be computed in GDP accounts using the income method, the production method and the expenditure
method.
(a) A car manufacturer buys components from Japan for $1 to be used in production later on and stores
them at its warehouse.
Production Income Expenditure
0 0 Imports -1
Investment 1
Total 0 Total 0 Total 0
(b) A car manufacturer buys components from Japan for $1 and uses half of those components in the
production of a car, that it sells to Andy for $2. It stores the rest of the components.
Production Income Expenditure
Manufacturing 1.5 Pro
ts 1.5 Imports -1
Investment 0.5
Consumption 2
Total 1.5 Total 1.5 Total 1.5
(c) An army battalion is deployed to the border to repel a threatened Canadian invasion. The soldiers
earn wages of $10,000 and use ammunition that the government buys for $5,000. The ammunition
is produced using $2,000 of imported steel and 100 hours of work, for which the workers were paid
$1,000.
5
, This is a solutions manual for A Course in Modern Macroeconomics. Many exercises admit more than one
correct answer; the model answers provided here are just suggestions. If you
nd mistakes or have comments,
let me know at .
3
,
, CHAPTER 1
GDP
Exercises
1.1 Accounting
How does GDP accounting record the following events? For each of them, describe how they would
be computed in GDP accounts using the income method, the production method and the expenditure
method.
(a) A car manufacturer buys components from Japan for $1 to be used in production later on and stores
them at its warehouse.
Production Income Expenditure
0 0 Imports -1
Investment 1
Total 0 Total 0 Total 0
(b) A car manufacturer buys components from Japan for $1 and uses half of those components in the
production of a car, that it sells to Andy for $2. It stores the rest of the components.
Production Income Expenditure
Manufacturing 1.5 Pro
ts 1.5 Imports -1
Investment 0.5
Consumption 2
Total 1.5 Total 1.5 Total 1.5
(c) An army battalion is deployed to the border to repel a threatened Canadian invasion. The soldiers
earn wages of $10,000 and use ammunition that the government buys for $5,000. The ammunition
is produced using $2,000 of imported steel and 100 hours of work, for which the workers were paid
$1,000.
5
