ECONOMIC DEVELOPMENT

EXERCISE 1: THE GROSS DOMESTIC PRODUCT

1.) In a simple economy suppose that all income is either compensation of employees or profits. Suppose also
that there are no indirect taxes. Calculate gross domestic product from the following set of numbers.

Consumption 5,000
Investment 1,000
Depreciation 600
Profits 900
Exports 500
Compensation of employees 5,300
Government purchases 1,000
Direct taxes 800
Saving 1,100
Imports 700

2.) Which of the following transactions would not be counted in GDP? Explain your answers.
a. General Motors issues new shares of stock to finance the construction of a plant.
b. General Motors builds a new plant.
c. Company A successfully launches a hostile takeover of company B, in which company A purchases
all the assets of company B.
d. Your grandmother wins $10 million in the lottery.
e. You buy a new copy of this textbook.
f. You buy a used copy of this textbook.
g. The government pays out Social Security benefits.
h. A public utility installs new antipollution equipment in its smokestacks.
i. Luigi’s Pizza buys 30 pounds of mozzarella cheese, holds it in inventory for 1 month, and then uses
it to make pizza (which it sells).
j. You spend the weekend cleaning your apartment.
k. A drug dealer sells $500 worth of illegal drugs.

3.) Do you agree or disagree with the following statements? Explain.

a. Double counting occurs when final goods are counted directly in calculating GDP.
b. GDP is equal to total sales.

4.) Suppose a country named "XYZ" produces the following goods and services in a given year:

 200,000 tons of wheat, valued at $350 per ton

 30,000 cars, valued at $25,000 each
 8,000 houses, valued at $300,000 each
 4,000 tons of steel, valued at $2,000 per ton
 1,500 units of software, valued at $15,000 per unit

In addition, there are 15 million citizens of XYZ living in the country, with a total income of $500 billion,
and 1 million citizens of XYZ living abroad, with a total income of $50 billion.

Compute:
a) The GDP of XYZ
b) The GNP of XYZ