Econ 202 C&D

Fall 2021 İnci Gümüş

Problem Set 1

Question 1

Citizens of the country of Heehaw produce hay and provide entertainment services (banjo
playing). In one year they produced $15 million worth of hay, with $11 million consumed
domestically and the other $4 million sold to neighboring countries. They provided $7 million
worth of banjo-playing services, $5 million in Heehaw, and $2 million in neighboring
countries. They purchased $6 million worth of soda pop from neighboring countries.

Calculate the magnitudes of GNP, GDP, net factor payments from abroad, net exports, and
the current account balance.

Question 2

You are given the following information about an economy:

Investment = 80
Consumption = 150
Net exports = -30
Gross domestic product (GDP) = 250
Factor income received from rest of the world = 15
Factor payments made to rest of the world = 8
Taxes = 70
Government transfer payments to the domestic private sector = 10
Interest payments from the government to the domestic private sector = 15

Find the following:

a. Net factor payments from abroad

b. GNP
c. Current account balance
d. Government purchases of goods and services
e. Private saving
f. Government saving
g. National saving

Question 3

ABC Computer Company produces computers and computer components. During the current
year ABC builds $2.4 million worth of computers and $1.6 million worth of computer
components. ABC’s costs are labor payments, $1.5 million; interest on debt $0.2 million; and
taxes, $0.3 million. ABC sells the computers it produces to households and the computer
components to XYZ Supercomputer.

1
Using ABC’s components, XYZ builds four supercomputers at a cost of $0.8 million each
($0.4 million worth of components, $0.3 million in labor costs, and $0.1 million in taxes per
computer). XYZ sells its supercomputers to other businesses for $1.5 million each.

Calculate the contributions to GDP of these transactions using the product, expenditure and
income approaches.

Question 4

Consider an economy that produces and consumes hamburgers and shirts. In the following
table are data for two different years.

Year Year
2000 2005
Price of a hamburger 6 TL 10 TL
Price of a shirt 50 TL 60 TL

Number of hamburgers produced 1,000 1,100

Number of shirts produced 200 240

a. Using the year 2000 as the base year, compute the following statistics for each year:
Nominal GDP, real GDP, and GDP deflator.
b. How much has the economy grown between year 2000 and year 2005?
c. How much have prices risen between year 2000 and year 2005?

Question 5

You took out a loan one year ago at a nominal interest rate of 7.5%. The CPI stood at 173.2 at
the time and you expected it to rise to 178.6 over the year. Today the CPI is actually 179.5.
Calculate the expected real interest rate on the loan and the real interest rate on the loan.