inter macro homework 1 Page 1 of 4

inter macro homework 1 Page 1 of 4

1. Write your assigned student number in the box.
2. Submit the assignment with the pages stapled together.
3. To receive full credit, answers must be accompanied with relevant
solutions/explanations.
4. Write your response in the relevant space provided. Responses provided elsewhere will
be ignored. Furthermore, responses with unintelligible handwriting will be treated as
incorrect.
5. You acknowledge that this is your own individual work. Late homework is not
accepted.
Student Number
inter macro homework 1 Page 2 of 4
1. The following transactions occurred in a given year. Firm A manufactures leather using a
factory valued at $20,000. Suppose Firm A produced $2,000 worth of leather and incurred
the following costs: $1,000 for the salaries of workers, $100 for interest payments on a
bank loan, and taxes of $200. Firm A sold all of its leather to Firm B, which is a
manufacturer of luxury bags. Suppose Firm B produced four bags at a cost of $800 each.
The cost of each bag consisted of paying for $500 worth of raw materials, paying for the
salaries of workers for $200, and $100 in taxes. Firm B has a factory valued at $30,000.
Firm B sold to the public three of its four bags for $1,000 each. Calculate the contribution
to GDP using the following:
1) Production approach.
2) Income approach.
3) Expenditure approach.
inter macro homework 1 Page 3 of 4
2. Consider a two-good (A and B), two-period (year 1 and year 2) economy. In year 1, the
economy produced 10 units of A at a per unit price of $1 and 5 units of B at a per unit price
of $2. In year 2, the economy produced 15 units of A at a per unit price of $1 and 5 units
of B at a per unit price of $3. Calculate real GDP for years 1 and 2 using the following
methods:
1) Laspeyres.
2) Paasche.
3) Fisher.
4) Calculate and compare the growth rate of real GDP using the three approaches.
inter macro homework 1 Page 4 of 4
3. Mankiw, page 42, question 2. A farmer grows a bushel of wheat and sells it to a miller for
$1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The
baker uses the flour to make bread and sells the bread to an engineer for $6. The engineer
eats the bread.
1) What is the value added by each person?
2) What is the bread’s contribution to GDP?
4. Mankiw, page 42, question 3. Suppose a woman marries her butler. After they are married,
her husband continues to wait on her as before, and she continues to support him as before
(but as a husband rather than an employee).
1) How does the marriage affect GDP? (Note: That is, the butler is treated as a husband,
not as an employee)
2) How should it affect GDP? (Note: That is, the butler is treated as an employee, not as
a husband)