1. Consider an economy with two firms. Firm A produces tomatoes and firm B produces tomato sauce. In a given year, firm A produces 100,000 pounds of tomatoes, sells 40,000 pounds of tomatoes to firm B at $3 per pound, exports 60,000 pounds of tomatoes at $3 per pound. Firm A pays $100,000 in wages to consumers. Firm B produces 50,000 gallons of tomato sauce, and sells 40,000 gallons to domestic consumers at $4 per gallon, and stores 10,000 gallons as inventory. Firm B pays consumers $40,000 in wages. In addition to the 40,000 gallons of tomato sauce consumers buy from firm B, consumers import and consume 5,000 gallons of tomato sauce, and they pay $6 per gallon for the imported tomato sauce.
(a) Calculate GDP using
i. the product approach;
ii. the expenditure approach;
iii. the income approach.
(b) What is GNP in this economy? Determine GNP and GDP in the case where 20% of firm A's shares is owned by foreigners, so that 20% of its profits go to foreigners and are not distributed to domestic consumers.
2. Suppose there are two goods in the economy, avocados and bananas. The table below shows prices and quantities of these goods in years 1 and 2.
|
Year
|
Quantity of Avocados, QA
|
Price of Avocados, PA
|
Quantity of Bananas, QB
|
Price of Bananas, PB
|
|
1
|
80
|
$1
|
100
|
$1
|
|
2
|
100
|
$2
|
150
|
$1.1
|
You will need a calculator to answer the questions below.
(a) Calculate the GDP deflator in years 1 and 2 using 1 as the base year. Calculate the GDP deflator in years 1 and 2 using 2 as the base year. Compute inflation in the both cases.
(b) Why do you think the inflation depends on the choice of the base year in this example?
3. Suppose that the unemployment rate is 10%, the total working age population is 50 million, and the number of unemployed is 4 million. Determine:
(a) the labor force;
(b) the labor force participation rate;
(c) the number of employed workers;
(d) the employment/population ratio.
(e) Suppose the adult population (P OP) increased by 10%, the labor force participation rate increased by 7.5%, and the unemployment rate increased to 15% (instead of 10%). What is the number of unemployed worker?