marco economics solution
Answers to Textbook Questions
Chapter 1
Answers to Problems
1. The market value of production is (300 fish x 1 clamshell each) + (5 boars x 10 clamshells each) + (200 bunches of bananas x 5 clamshells each) = 300 + 50 + 1000 =
1350. Al’s digging bait represents an intermediate service, which is not counted in
GDP, nor is the purchase of an existing asset (mature banana trees) counted in GDP.
So the GDP of the island is 1350 clamshells.
2. Value added by each firm is as follows:
Intelligence Inc.: 100 chips x $200 = $20,000
Macrosoft: 100 software packages x $50 = $5000
Bell: 100 computers x $800 minus purchased inputs ($20,000 in chips and $5000 in software) = $80,000 – $25,000 = $55,000
PC Charlie’s: 100 computers x $1000 minus purchased inputs ($80,000 in computers at wholesale) = $100,000 – $80,000 = $20,000
Sum of value addeds: $20,000 + $5,000 + $55,000 + $20,000 = $100,000
This is the same result we get by summing up the market values of final goods and services (the 100 computers sold by PC Charlie’s at $1000 each equal $100,000).
3. We find the four components of expenditure:
Consumption expenditures are 600. These already include household purchases of durable goods, so those would not be counted again.
Investment expenditures equal residential construction (100) plus business fixed investment (100) plus inventory investment (change in stocks over the year, or 25), for a total of 225. Sales of existing homes and apartments are not counted in investment or GDP.
Government purchases are 200. Government payments to retirees are transfers and are not counted.
Net exports are exports (75) minus imports (50), or 25.
GDP is the sum of the four components: 600 + 225 + 200 + 25 = 1050.
4. It would not be correct to decide against the policy because it is projected to reduce real GDP. Rather, the costs and benefits of the policy should be compared. The reduction (if any) in real GDP is relevant when measuring the cost of the proposed
Chapter 1
Answers to Problems
1. The market value of production is (300 fish x 1 clamshell each) + (5 boars x 10 clamshells each) + (200 bunches of bananas x 5 clamshells each) = 300 + 50 + 1000 =
1350. Al’s digging bait represents an intermediate service, which is not counted in
GDP, nor is the purchase of an existing asset (mature banana trees) counted in GDP.
So the GDP of the island is 1350 clamshells.
2. Value added by each firm is as follows:
Intelligence Inc.: 100 chips x $200 = $20,000
Macrosoft: 100 software packages x $50 = $5000
Bell: 100 computers x $800 minus purchased inputs ($20,000 in chips and $5000 in software) = $80,000 – $25,000 = $55,000
PC Charlie’s: 100 computers x $1000 minus purchased inputs ($80,000 in computers at wholesale) = $100,000 – $80,000 = $20,000
Sum of value addeds: $20,000 + $5,000 + $55,000 + $20,000 = $100,000
This is the same result we get by summing up the market values of final goods and services (the 100 computers sold by PC Charlie’s at $1000 each equal $100,000).
3. We find the four components of expenditure:
Consumption expenditures are 600. These already include household purchases of durable goods, so those would not be counted again.
Investment expenditures equal residential construction (100) plus business fixed investment (100) plus inventory investment (change in stocks over the year, or 25), for a total of 225. Sales of existing homes and apartments are not counted in investment or GDP.
Government purchases are 200. Government payments to retirees are transfers and are not counted.
Net exports are exports (75) minus imports (50), or 25.
GDP is the sum of the four components: 600 + 225 + 200 + 25 = 1050.
4. It would not be correct to decide against the policy because it is projected to reduce real GDP. Rather, the costs and benefits of the policy should be compared. The reduction (if any) in real GDP is relevant when measuring the cost of the proposed