econ6022 homework1 sol

Macroeconomic Analysis
ECON 6022A
Fall 2013
Solutions to Problem Set 1

September 30, 2013

1

National Income Accounting

ABC Computer Company has a $20,000,000 factory in Silicon Valley. During the current year ABC builds
$2,000,000 worth of computer components. ABC’s costs are labor, $1,000,000; interest on debt, $100,000; and taxes, $200,000.
ABC sells all its output output to XYZ Supercomputer. Using ABC’s components, XYZ builds four supercomputers at a cost of $800,000 each ($500,000 worth of components, $200,000 in labor costs, and
$100,000 in taxes per computer). XYZ has a $30,000,000 factory.
XYZ sells three of the supercomputers for $1,000,000 each. At year’s end, it had not sold the fourth.
The unsold computer is carried on XYZ’s books as an $800,000 in crease in inventory.
1. Calculate the contributes to GDP of these transactions, showing that all three approaches give the same answer.
2. Repeat 1), but now assume that, in addition to its other costs, ABC paid $500,000 for imported computer chips.
Solution:
1.1)

i. Production Approach:
GDP = $2M (computer components produced by ABC) + 3 × ($1M − $0.5M) (valued added by
XYZ) + ($0.8M − $0.5M) (valued added by XYZ’s inventory) = $3.8M ii. Income Approach:
GDP =
$1M (labors’ income) + $0.1M (interests on debt) + $0.9M (firm’s pretax income) +
Incomes related to ABC = $2M
4 × $0.2M (labors’ income) + 3 × $0.3M (firm’s pretax income) + $0.1M (firm’s pretax income from inventory)
XYZ’s related incomes = $1.8M
= $3.8M
1

iii. Expenditure Approach:
GDP = 3 × $1M (spent on the 3 supercomputers) + $0.8M (spent on XYZ’s inventory) = $3.8M
1.2)

i. Production Approach: ABC paid $0.5M for imported computer chips
GDP = ($2M − $0.5M) (domestic values added by ABC) + 3 × ($1M − $0.5M) (values added by XYZ) + ($0.8M − $0.5M) (valued added by XYZ’s inventory) = $3.3M ii. Income Approach:
GDP =
$1M (labors’ income) + $0.1M (interests on debt) + ($0.9M - $0.5M) (firm’s pretax