E322: Intermediate Macroeconomics
Home work 1: Solutions
2. Coal producer, steel producer, and consumers.
(a) (i) Product approach: Coal producer produces 15 million tons of coal at $5/ton,
which adds $75 million to GDP. The steel producer produces $10 million tons of steel at
$20/ton, which is worth $200 million. The steel producer pays $125 million for 25
million tons of coal at $5/ton. The steel producer’s value added is therefore $75 million.
GDP is equal to $75 million $75 million $150 million.
(ii) Expenditure approach: Consumers buy 8 million tons of steel at $20/ton, so
consumption is $160 million. There is no investment and no government spending.
Exports are 2 million tons of steel at $20/ton, which is worth $40 million. Imports are 10
million tons of coal at $5/ton, which is worth $50 million. Net exports are therefore equal
to $40 million $50 million $10 million. GDP is therefore equal to $160 million
($10 million) $150 million.
(iii) Income approach: The coal producer pays $50 million in wages and the steel
producer pays $40 million in wages, so total wages in the economy equal $90 million.
The coal producer receives $75 million in revenue for selling 15 million tons at $15/ton.
The coal producer pays $50 million in wages, so the coal producer’s profits are $25
million. The steel producer receives $200 million in revenue for selling 10 million tons of
steel at $20/ton. The steel producer pays $40 million in wages and pays $125 million for
the 25 million tons of coal that it needs to produce steel. The steel producer’s profits are
therefore equal to $200 $40 million $125 million $35 million. Total profit income
in the economy is therefore $25 million $35 million $60 million. GDP therefore is
equal to wage income ($90 million) plus profit income ($60 million). GDP is therefore
$150 million.
(b) There are no net factor payments from abroad in this example. Therefore, the
current account surplus is equal to net exports, which is equal to ($10 million).
(c) As originally formulated, GNP is equal to GDP, which is equal to $150 million.
Alternatively, if foreigners receive $25 million in coal industry profits as income, then
net factor payments from abroad are ($25 million), so GNP is equal to $125 million.
3. (a) Product approach: Firm A produces 50,000 bushels of wheat, with no
intermediate goods inputs. At $3/bu., the value of Firm A’s production is equal to
$150,000. Firm B produces 50,00 loaves of bread at $2/loaf, which is valued at $100,000.
Firm B pays $60,000 to firm A for 20,000 bushels of wheat, which is an intermediate
input. Firm B’s value added is therefore $40,000. GDP is therefore equal to $190,000.
(b) Expenditure approach: Consumers buy 50,000 loaves of domestically produced
bread at $2/loaf and 15,000 loaves of imported bread at $1/loaf. Consumption spending is
therefore equal to $100,000 $15,000 $115,000. Firm A adds 5,000 bushels of wheat
to inventory. Wheat is worth $3/bu., so investment is equal to $15,000. Firm A exports
25,000 bushels of wheat for $3/bu. Exports are $75,000. Consumers import 15,000 loaves
of bread at $1/loaf. Imports are $15,000. Net exports are equal to $75,000 $15,000
$60,000. There is no government spending. GDP is equal to consumption ($115,000) plus
investment ($15,000) plus net exports ($60,000). GDP is therefore equal to $190,000.
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Home work 1: Solutions
2. Coal producer, steel producer, and consumers.
(a) (i) Product approach: Coal producer produces 15 million tons of coal at $5/ton,
which adds $75 million to GDP. The steel producer produces $10 million tons of steel at
$20/ton, which is worth $200 million. The steel producer pays $125 million for 25
million tons of coal at $5/ton. The steel producer’s value added is therefore $75 million.
GDP is equal to $75 million $75 million $150 million.
(ii) Expenditure approach: Consumers buy 8 million tons of steel at $20/ton, so
consumption is $160 million. There is no investment and no government spending.
Exports are 2 million tons of steel at $20/ton, which is worth $40 million. Imports are 10
million tons of coal at $5/ton, which is worth $50 million. Net exports are therefore equal
to $40 million $50 million $10 million. GDP is therefore equal to $160 million
($10 million) $150 million.
(iii) Income approach: The coal producer pays $50 million in wages and the steel
producer pays $40 million in wages, so total wages in the economy equal $90 million.
The coal producer receives $75 million in revenue for selling 15 million tons at $15/ton.
The coal producer pays $50 million in wages, so the coal producer’s profits are $25
million. The steel producer receives $200 million in revenue for selling 10 million tons of
steel at $20/ton. The steel producer pays $40 million in wages and pays $125 million for
the 25 million tons of coal that it needs to produce steel. The steel producer’s profits are
therefore equal to $200 $40 million $125 million $35 million. Total profit income
in the economy is therefore $25 million $35 million $60 million. GDP therefore is
equal to wage income ($90 million) plus profit income ($60 million). GDP is therefore
$150 million.
(b) There are no net factor payments from abroad in this example. Therefore, the
current account surplus is equal to net exports, which is equal to ($10 million).
(c) As originally formulated, GNP is equal to GDP, which is equal to $150 million.
Alternatively, if foreigners receive $25 million in coal industry profits as income, then
net factor payments from abroad are ($25 million), so GNP is equal to $125 million.
3. (a) Product approach: Firm A produces 50,000 bushels of wheat, with no
intermediate goods inputs. At $3/bu., the value of Firm A’s production is equal to
$150,000. Firm B produces 50,00 loaves of bread at $2/loaf, which is valued at $100,000.
Firm B pays $60,000 to firm A for 20,000 bushels of wheat, which is an intermediate
input. Firm B’s value added is therefore $40,000. GDP is therefore equal to $190,000.
(b) Expenditure approach: Consumers buy 50,000 loaves of domestically produced
bread at $2/loaf and 15,000 loaves of imported bread at $1/loaf. Consumption spending is
therefore equal to $100,000 $15,000 $115,000. Firm A adds 5,000 bushels of wheat
to inventory. Wheat is worth $3/bu., so investment is equal to $15,000. Firm A exports
25,000 bushels of wheat for $3/bu. Exports are $75,000. Consumers import 15,000 loaves
of bread at $1/loaf. Imports are $15,000. Net exports are equal to $75,000 $15,000
$60,000. There is no government spending. GDP is equal to consumption ($115,000) plus
investment ($15,000) plus net exports ($60,000). GDP is therefore equal to $190,000.
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