202201004 김진솔 Homework1

Problem1

1. Production Approach (Value Added Approach)

 Firm A (Wheat Production):

o Firm A produces 50 bushels of wheat, but the important
values are what are sold to other firms or consumers.
o Firm A sells 20 bushels to Firm B at $3 per bushel:
20 bushels×3 dollars/bushel=60 dollars
o Firm A exports 25 bushels at $3 per bushel:
25 bushels×3 dollars/bushel=75 dollars
o The remaining 5 bushels are stored as inventory. These do not
count in GDP until they are sold, so they contribute $0 to the
GDP for the current year.
 Firm B (Bread Production):
o Firm B produces 50 loaves of bread and sells them to
consumers at $2 per loaf:50 loaves×2 dollars/loaf=100 dollars
o Firm B buys 20 bushels of wheat from Firm A at $3 per bushel
(this is an intermediate good):20 bushels×3 dollars/bushel=60
dollars This is subtracted in the final GDP calculation because
it's part of the value-added calculation.

Thus, the Value Added for each firm:

 Firm A: Value added = Revenue from wheat sales = 60+75=135

dollars.
 Firm B: Value added = Revenue from bread sales - Cost of wheat
(intermediate good) = 100−60=40 dollars.

Total GDP (Production Approach):

GDP=135 (Firm A)+40 (Firm B)=175 dollars.

2. Income Approach

 Firm A pays $50 in wages to workers.

 Firm B pays $20 in wages to workers.
 Total income = 50+20=70 dollars.

However, we also need to account for profits:

 Firm A has profits from the wheat sales:

o Revenue = 60+75=135 dollars.
o Costs = wages paid = $50.
 o Profit for Firm A = 135−50=85 dollars.
 Firm B has profits from the bread sales:
o Revenue = 100 dollars.
o Costs = wages + cost of wheat = 20+60=80 dollars.
o Profit for Firm B = 100−80=20 dollars.

Thus, the total income (GDP) using the Income Approach is:

GDP=Wages+Profits=70+85+20=175 dollars.

3. Expenditure Approach

 Consumer Spending:
o Consumers spend $100 on bread produced by Firm B (50
loaves at $2 per loaf).
o Consumers import and consume 15 loaves from France at $1
per loaf:
15 loaves×1 dollar/loaf=15 dollars.
 Investment (Inventory):
o Firm A stores 5 bushels of wheat as inventory, but this is not
part of final consumption for the year. It is counted
as investment (inventory investment) for GDP purposes. The
value of the inventory is 5 bushels×3 dollars/bushel=15
dollars.
 Exports:
o Exports of wheat by Firm A:
25 bushels×3 dollars/bushel=75 dollars.

Thus, the total expenditure is:

GDP=Consumer Spending+Imports+Investment+ExportsGDP=100+15+1
5+75=175 dollars.

Problem2

1. Calculating GDP using all three approaches

Let's calculate GDP for this economy using the Production

Approach, Income Approach, and Expenditure Approach.

Production Approach (Value Added Approach)

 Coal Producer:
o The coal producer sells 15 tons of coal for $5 per ton:
15 tons×5 dollars/ton=75 dollars.
o The coal producer pays $50 in wages to workers, so the value
added by the coal producer is $75 (the total revenue from
 coal) minus the wages paid, as wages are part of the cost of
production and represent income, not value added at this
stage. Thus, value added by coal producer is $75.
 Steel Producer:
o The steel producer produces 10 tons of steel and sells it for
$20 per ton:
10 tons×20 dollars/ton=200 dollars.
o The steel producer purchases 15 tons of coal from the
domestic coal producer and 10 tons of coal from imports.
o The total value of domestic coal used by the steel producer
is: 15 tons×5 dollars/ton=75 dollars.
 Since the imported coal is purchased from abroad, it is
not counted in GDP. Thus, value added by steel
producer is $200 (revenue from steel) minus $75 (cost
of domestic coal), which equals $125.

Thus, the total value added (GDP using the production approach) is:

GDP=75 (Coal Producer)+125 (Steel Producer)=200 dollars.

Income Approach (Income from Factors of Production)

 Wages:
o Coal producer pays $50 in wages.
o Steel producer pays $40 in wages.
o Total wages = $50 + $40 = $90.
 Profits:
o Coal Producer:
 Revenue = $75 (from selling coal).
 Wages = $50.
 Profit = 75−50=25 dollars.
o Steel Producer:
 Revenue = $200 (from selling steel).
 Cost of domestic coal = $75 (for the 15 tons of coal).
 Wages = $40.
 Profit = 200−75−40=85 dollars.

Thus, the total income (GDP using the income approach) is:

GDP=Wages+Profits=90 (Wages)+25 (Coal Producer Profit)+85 (Steel Pro

ducer Profit)=200 dollars.

Expenditure Approach (Expenditure on Final Goods and Services)

 Consumption (C):
 o Domestic consumers buy 8 tons of steel at $20 per ton:
8 tons×20 dollars/ton=160 dollars.
 Exports (X):
o 2 tons of steel are exported at $20 per ton:
2 tons×20 dollars/ton=40 dollars.

Thus, the total expenditure (GDP using the expenditure approach) is:

GDP=Consumption+Exports=160 (Consumption)+40 (Exports)=200

dollars.

Conclusion for GDP: In all three approaches, we calculate GDP = 200

dollars.

2. Calculate the Current Account Surplus

 Exports: 2 tons of steel, worth 2×20=40 dollars2.

 Imports: 10 tons of coal, imported at $5 per ton, worth 10×5=50
dollars.

Thus, the current account surplus is:

Current Account Surplus=Exports−Imports=40−50=−10 dollars.

So, there is a current account deficit of 10 dollars.

3. Calculate GNP

Gross National Product (GNP) is the total income earned by the residents
of a country, both domestically and abroad. It is calculated as:

GNP=GDP+Net income from abroad.

In this case, the net income from abroad is related to profits earned by
foreign owners of the coal producer.

 The coal producer is owned by foreigners, and the profits of the coal
producer, which are $25, will be sent abroad.

Thus, net income from abroad is:

Net income from abroad=−25 dollars (since profits are leaving the country
).
So, GNP is:

GNP=200 (GDP)+(−25)=175 dollars.

4. Calculate GNP and GDP when the Coal Producer is

Owned by Foreigners

If the coal producer is owned by foreigners, then the profits earned by the
coal producer, which are $25, are repatriated to foreign owners.

 GDP remains the same as calculated earlier:

GDP=200 dollars.
 GNP in this case would account for the fact that the profits of the
coal producer are leaving the country.

Thus, GNP would be:

GNP=GDP−Foreign Profits=200−25=175 dollars.

Problem3

1. Nominal GDP in Period 1 and Period 2

 Nominal GDP in Year 1:

o Price of a hamburger = $5.0
o Price of a beer = $2.0
o Quantity of hamburgers produced = 10
o Quantity of beers produced = 10

Nominal GDP in Year 1=(10×5)+(10×2)=50+20=70 dollars.

Nominal GDP in Year 2:

o Price of a hamburger = $10.0

o Price of a beer = $2.0
o Quantity of hamburgers produced = 6
o Quantity of beers produced = 8

Nominal GDP in Year 2=(6×10)+(8×2)=60+16=76 dollars.

2. Real GDP in Period 1 and Period 2 (using Year 1 as the
base year)

 Real GDP in Year 1: Since we are using Year 1 as the base year,
the nominal and real GDP in Year 1 are the same.

Real GDP in Year 1=70 dollars.

Real GDP in Year 2 (using Year 1 as the base year): In Year 2, we

use the prices from Year 1 to calculate the real GDP.

o Price of a hamburger in Year 1 = $5.0

o Price of a beer in Year 1 = $2.0
o Quantity of hamburgers produced in Year 2 = 6
o Quantity of beers produced in Year 2 = 8

Real GDP in Year 2=(6×5)+(8×2)=30+16=46 dollars.

3. Real GDP in Period 1 and Period 2 (using Year 2 as the

base year)

 Real GDP in Year 1 (using Year 2 as the base year): In Year 1, we

use the prices from Year 2 to calculate the real GDP.
o Price of a hamburger in Year 2 = $10.0
o Price of a beer in Year 2 = $2.0
o Quantity of hamburgers produced in Year 1 = 10
o Quantity of beers produced in Year 1 = 10

Real GDP in Year 1=(10×10)+(10×2)=100+20=120 dollars.

Real GDP in Year 2 (using Year 2 as the base year): Since Year 2 is
the base year, the real GDP for Year 2 is equal to its nominal GDP.

Real GDP in Year 2=76 dollars.

4. Growth Rate of Real GDP using the Chain-Weighting

Approach

Calculate the growth rate of real GDP between Year 1 and

Year 2, using Year 1 as the base year:

Growth Rate (Year 1 to Year 2)=Real GDP in Year 2 (Base Year 1)Re
al GDP in Year 1 (Base Year 1)−1=4670−1=0.6571−1=−0.3429 (or
−34.29%).
 Calculate the growth rate of real GDP between Year 1 and
Year 2, using Year 2 as the base year:

Growth Rate (Year 1 to Year 2)=Real GDP in Year 2 (Base Year 2)Re
al GDP in Year 1 (Base Year 2)−1=76120−1=0.6333−1=−0.3667
(or −36.67%).

Calculate the chain-weighted average growth rate:

Chain-weighted growth rate=(1−0.3429)×(1−0.3667)−1=0.6571×0

.6333−1=0.4167−1=0.645−1=−0.355 (or −35.5%).

5. Calculate the Inflation Rate using the GDP Deflator

GDP Deflator=Nominal GDPReal GDP×100.

GDP Deflator in Year 1 (using Year 1 as the base year):

GDP Deflator in Year 1=7070×100=100.

GDP Deflator in Year 2 (using Year 1 as the base year):

GDP Deflator in Year 2=7646×100=165.22.

Inflation Rate: The inflation rate is the percentage change in the

GDP deflator between two years.

Inflation Rate=GDP Deflator in Year 2−GDP Deflator in Year 1GDP D

eflator in Year 1×100=165.22−100100×100=65.22%.

Problem4

1. Jim's Contribution to GDP and Profit

Contribution to GDP: Jim sells $1,100 worth of flowers and uses no

intermediate inputs, meaning the entire revenue from selling flowers
contributes to GDP. This is the value added to the economy.

Jim’s Contribution to GDP=1,100 dollars

Profit: To calculate Jim's profit, we subtract his costs (wages, taxes, and
interest) from his revenue.
  Wages = $700
 Taxes = $100
 Interest = $200

Profit=Revenue−Costs=1,100−(700+100+200)=1,100−1,000=100
dollars.

2. Acme Steel’s Contribution to GDP and Profit

Contribution to GDP: Acme Steel produces 1,000 tons of steel, selling

for $30 per ton. The total revenue from selling steel is:

Revenue=1,000×30=30,000 dollars.

To calculate Acme’s contribution to GDP, we use the value-added

approach, which subtracts the cost of intermediate goods (in this case,
coal) from the total revenue.

 Revenue from steel = $30,000

 Cost of coal (intermediate input) = $15,000

Acme’s Contribution to GDP=30,000−15,000=15,000 dollars.

Profit: To calculate Acme’s profit, we subtract all costs (wages, coal,

taxes) from the revenue:

 Wages = $10,000
 Cost of coal = $15,000
 Taxes = $2,000

Profit=Revenue−(Wages+Cost of Coal+Taxes)=30,000−(10,000+15,000
+2,000)=30,000−27,000=3,000 dollars.

3. Government's Contribution to GDP (Production

Approach)

In the production approach, the government’s contribution to GDP is

measured by its expenditure on goods and services. This includes the
wages paid to government workers and government spending, but
excludes transfers like Social Security benefits and interest on the
national debt since they are not payments for goods and services.

 Wages paid to government workers = $1 million

Government’s Contribution to GDP=1,000,000 dollars.

4. Private Savings

Private Savings=National Saving−Government Saving.National Saving =

$200

 Government Budget Deficit = $50 (this means the government is

dissaving, i.e., its savings are negative)

Since the government budget deficit represents dissaving, the

government's saving is negative $50. Thus, private savings is:

Private Savings=200−(−50)=200+50=250 dollars.

5. Investment

Investment=National Saving+Current Account Surplus.

We are given:

 National Saving = $200

 Current Account Surplus = -$100 (i.e., a current account deficit of
$100)

Thus, investment is:

Investment=200+(−100)=200−100=100 dollars.