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I. Hakan Yetkiner http://www.hakanyetkiner.com Izmir University of Economics Department of Economics ECON 300 Advanced Macroeconomics Dr. Yetkiner 02 October 2012 Key to Exercise 1 The Measurement of GDP 1. (Adapted from MIT Open University) There are an orange farm and an orange juice company in a country called Orangeland. Orangelanders live only on orange juice. In 1992, the orange farm produced 10 oranges, and sold them to the orange juice company at $1 each. The orange juice company produced 3 bottles of orange juice, and sold them all at a unit price of $10 plus 10% indirect tax collected by government (so the price paid was actually $11). The orange farm paid total wages of $6. The orange juice company paid total wages of $10. The orange juice company also had to pay $4 to replace the orange juice extractor that was not working properly due to its use during 1992 (depreciation). Both companies retained 50% of their profits and paid the rest of it as dividends to the households. After receiving their wage income and their dividends, the households paid a 10% direct tax on their total income to the government. The government bought one orange juice bottle (notice that the firms are not paying any direct taxes on their retained profits). Answer the following questions. a. Compute the GDP of Orangeland using the value added, expenditure, and income approaches. Value added Expenditure Income 10+23 = $33 11+22 = $33 16+4+6+3+4 = $33 b. What is NDP? What is National Income? NNP=GDP-Depreciation=33-4=29 NI=NNP-Indirect Taxes=29-3=26 c. What is the total income of the government? Government Income = 3+2.1 = 5.1 d. What is the disposable income? YD = 26-2.1=23.9 e. What is government budget deficit (or surplus)? Government Deficit = 11 - 5.1 = 5.9 1 I. Hakan Yetkiner http://www.hakanyetkiner.com Izmir University of Economics Department of Economics 2. (Calculate the GDP of Farmland, a fictitious economy whose numbers are listed below. Do so using all three methods (value added approach, income approach, and expenditure approach). Farmland, year 2008 Farmer Jones, (private firm) Corn Sold to Govt Corn Sold to Singapore Corn Sold to FoodCo, Inc Payment to workers Tax on profit FoodCo, Inc Sold Corn Flakes to Consumers Sold Corn Flakes to Govt Bought corn from Farmer Jones Bought salt from Egypt Payment to workers Tax on Profit Corn Inventory Beginning of Year End of Year $30 $25 $20 $40 $15 $100 $20 $20 $10 $20 $15 $0 $5 Farmland Govt Taxes Purchase of Corn Purchase of Corn Flakes Unemployment benefits Paid $50 $30 $20 $15 Households Taxes on wage income Unemployment benefits Corn Flakes purchased Value-added Approach: Farmer Jones (30+25+20) + FoodCo (100+20-[20-5]-10 = 170 Expenditure Approach: C I 100 + 5 + (X-M) (25-10) = 170 Income Approach: Wage Income (40+20) + G 50 + 2 Profits (20+60) + $10 $15 $100 TA (15+15)= 170 I. Hakan Yetkiner http://www.hakanyetkiner.com Izmir University of Economics Department of Economics 3. Calculate the GDP of KingLand, a fictitious economy whose numbers are listed below. Do so using all three methods (value added approach, income approach, and expenditure approach). KingLand, year 2010 Farmer King, (private firm) Corn Sold to Govt Corn Sold to Singapore Corn Sold to KingFoodCo, Inc Bought pesticides from Egypt Payment to workers Tax on profit KingFoodCo, Inc Sold Corn Flakes to Consumers Sold Corn Flakes to Govt Bought corn from Farmer King Bought salt from Egypt Payment to workers Tax on Profit Corn Inventory Beginning of Year End of Year $30 $25 $20 $10 $40 $15 $100 $20 $20 $10 $20 $15 $10 $15 Govt Taxes Purchase of Corn Purchase of Corn Flakes Unemployment benefits Paid $50 $30 $20 $15 Households Taxes on wage income Unemployment benefits Corn Flakes purchased Value-added Approach: Farmer Jones (30+25+20-10) + FoodCo (100+20-[20-5]-10 = 160 Expenditure Approach: C I 100 + 5 + (X-M) (25-20) = 160 Income Approach: Wage Income (40+20) + G 50 + 3 Profits (10+60) + $10 $15 $100 TA (15+15)= 160