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Econ 102 – Fall 2012 Quiz 1 Name_____________ Leziz Pizza shop sold 1,000,000TL worth of pizzas in 2011 to consumers who come to the restaurant. The chop has incurred the following expenses in that year: food purchases (flour, tomato paste, cheese, veggies, meats) building rent electricity, water, etc workers wages franchise fee 200,000 TL 170,000 TL 16,000 TL 350,000 TL 50,000 TL i) What was the value-added for Leziz Pizza shop in 2011? Show your work. ii) What was Leziz Pizza shop’s economic profit? iii) How much does Leziz Pizza shop’s add to Turkey’s GDP? iv) Spending in the national economy is divided into four sectors: C, I, G, and NX. Which of these sectors does Leziz Pizza shop add to, given the above data? Explain. v) The owner of the Leziz Pizza shop plans to buy a used pizza oven. Will this action affect GDP? Explain. Econ 102 – Sp 2012 Quiz 1 KEY Bülent’s Pizza shop sold 1,000,000TL worth of pizzas in 2011. Bülent had the following expenses in that year: food purchases (wheat, tomato paste, cheese, veggies, meats) building rent electricity, water, etc workers wages franchise fee bribes to public officials 200,000 TL 170,000 TL 16,000 TL 350,000 TL 50,000 TL 4,000 TL The questions below refer to ‘official government statistics’, rather that theoretical definitions, unless specified. i) What was the value-added for Bülent’s shop in 2011? Show your work. In short, by official I am referring to the numbers that actually appear in the government’s (TUIK) statistics. Value-added is the difference between a firm’s sales and its purchases of intermediate goods. Sales are given as 1,000,000 TL so the issue is to calculate the amount of intermediate goods purchased by the firm. Two items in the list are intermediate goods, namely ‘food purchases’ and ‘electricity, water, etc’. The other items represent ‘income’ sources. Intermediate goods expense is 200 ,000 16,000 216 ,000 TL so the value-added is 1,000 ,000 216 ,000 784 ,000 TL. Note that, including Bülent’s intermediate goods purchase, pizzas add 1,000,000 TL to Turkey’s GDP. However some of that production was created before Bülent bought Intermediate Goods. ii) What was Bülent’s economic profit? This question is deeper than it seems. First, income has four sources: income = wages + rent + interest + profit. Interest expense is zero for this question; this is not representative of a typical firm because borrowing is usually a big part of running a business. I wanted to simplify the problem. Wage is given as 350,000 TL. Rent represents the income from ‘letting another use your property’. This example has two sources for rent: the building and the ‘franchise fee’. The total rent is 170 ,000 50 ,000 230 ,000 TL. Profit is defined by: TR TC TR intermediate goods wage rent interest value added wage rent interest 784 ,000 350 ,000 230 ,000 0 204 ,000 From this last calculation we can see that value-added equals Income, by the definition of the profit part of income. iii) How much does Bülent’s shop add to GDP? Since the firm’s value-added is 784,000 TL, the firm adds exactly the same amount to GDP. Valueadded represents new production! iv) Spending in the national economy is divided into four sectors: C, I, G, and NX. Which of these sectors does the activities of Bülent’s shop add to, given my data? Explain. This is a ‘trick question’ to the extent that the phrase ‘given my data’ has nothing to do with a proper answer. The likely answer is ‘C’, most pizza is eaten by consumers. However if the government were to buy a pizza within its duty we would add that spending to G. The Economics Department will buy pizzas for faculty and staff during exam grading for Econ 102. That purchase will be an Intermediate Good into the production of ‘education’. v) Bülent plans to buy a used pizza oven. Will this action affect GDP? Explain. GDP represents the market value of ‘new production’, only. The purchase of a used oven may be important to the buyer and seller, however, since the oven was not produced in the current year then it does not directly affect the current GDP measure. vi) About the bribes . . . is this in the official GDP measure? Explain. Collecting a bribe represents income for the government official taking the bribe and it reduces the owners profit. However collecting a bribe is not registered with the government, without a receipt (fiş) the transaction is not officially observed. It will not be in the official statistics.