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BASIC MACROECONOMICS - BMAK
Problem Set
1
th
Thursday, April 10 , 2025.
Question 1
Measuring GDP: Nettel and Cabell are two firms located in the country of Digiland. In 2017, Nettel won a contract with
the government of Digiland to build a free Wifi service system worth 17 million USD. To complete this project, Nettel spent
5 million USD on buying the cable from Cabell and employed 250 workers from Digiland, which it paid the annual wages
and salaries of $ 20,000 per person. Nettel also employed 100 manual workers from the neighboring country of
Agriland, to whom it paid a compensation package of $10,000 per person. Nettel paid 5 million USD in dividends, 1
million USD in taxes, and invested in a new internet service center which cost 2 million USD, buying the necessary
equipment from Nettel itself. In 2017, Nettel also made a 2.5 million USD profit from operating an internet firm in
Agriland. It remitted half of the income to Digiland and reinvested the other half.
At the beginning of 2017, Cabell had 4 million USD of cable in inventory, which was later in 2017 sold to the households
in Digiland for a total revenue of 6 million USD. During the year, it imported 10 million USD of copper from Agriland,
employed 500 workers from Digiland and 500 workers from Agriland, all of whom it paid a package of $8,000 per year. It
exported 4 million USD of cable to Agriland and sold 10 million USD of cables and home equipment to the households of
Digiland. At the end of 2017, Cabell had 7 million USD of cable in its inventory. Besides paying 1 million in taxes, Cabell
paid all the remaining profit to its owners as dividends. Labor income taxes in Digiland is 15%, and capital income taxes
are 5%.
a) Compile the 2017 GDP for the country of Digiland using the expenditure, product and income approaches. Show your
work. What is the value of dividends that Cabell paid to its owners in 2017?
b) Compile the GNP for Digiland in 2017. Show your work.
c) Explain the implication of the statement, "Good measurement is the prelude to sensible analysis."
d) Governments and organizations have spent a substantial amount of money on finding alternative measures of well-being
instead of GDP. What are the limitations of these alternative measures compared with GDP as a measure of the standard of
living?
Question 2
In the year 2016, Kiel-based Pausenlos produces 50,000 lawn mower engines. The market value of each lawn mower engine is
50 euros. In producing these 50,000 lawn mower engines, Pausenlos incurs the following production costs for each lawn mower
engine: labor cost: 10 Euro; imported components from Vietnam: 5 Euro; interest payment on debt: 5 Euro. Pausenlos sells
35,000 of the lawn mower engines it produced to Rostock-based Grünland and 5,000 of these lawn mower engines to private
customers in Sweden. Finally, Pausenlos places the remaining 10,000 lawn mower engines it produced into its inventory.
In the year 2016, Grünland produces 35,000 lawnmowers. The market value of each lawn mower is 150 euros. In producing
these 35,000 lawn mowers, Grünland incurs the following costs of production for each lawn mower produced: labor cost: 25
Euro; imported components from Slovakia: 20 Euro; lawn mower engines purchased from Pausenlos: 50 Euro; tax payments:
5 Euro. Grünland sells 25,000 of the lawnmowers it produces to private customers in Germany and 5,000 to private customers
in Denmark. Finally, Grünland places the remaining 5,000 lawnmowers it produced into its inventory.
Suppose that in the year 2016, there are no further transactions of relevance in the German economy comprising the two
firms Pausenlos and Grünland. Using the income and expenditure approaches, calculate the year 2016 GDP of the German
economy.
Question 3
For this problem, consider two companies: Noisy Music GmbH (which is located in country Sunny) and Plain Pictures AG
(which is located in country Windy).
Noisy Music enters the year 2016 with a capital stock worth 2,000,000 euros. During 2016, Noisy Music produces 30,000
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headphones. Noisy Music’s costs for the production of each headphone are as follows: cost of labor from workers who are
nationals of Sunny: 15 Euro; cost of labor from workers who are nationals of Windy: 15 Euro; depreciation of capital stock:
5 Euro. Noisy Music in 2016 sold 25,000 headphones at a price of 100 Euro per headphone (of the 25,000 headphones sold,
15,000 are sold to private households in Sunny, 5,000 to private households in Windy and 5,000 to private households in a
third country, Rainy). Finally, Noisy Music places the remaining 5,000 headphones produced but not sold in 2016 into its
inventory. Also, during 2016, the owners of Noisy Music on the stock exchange of Windy purchased 6,000 newly issued shares
of the stock of Plain Pictures AG at a price of 10 Euros per share.
Plain Pictures enters the year 2016 with a capital stock worth 5,000,000 euros. During 2016, Plain Pictures produced
50,000 blu ray players at the cost of 100 Euro each (imported components from Rainy: 20 Euro; cost of labor from workers
who are nationals of Windy, 50 Euro; cost of labor from workers who are nationals of Sunny, 20 Euro; depreciation of capital
stock: 10 Euro). Plain Pictures sells 25,000 of the blu ray players it produced in 2016 at a price of 200 Euro each to private
households in Windy; it sells 10,000 of the blu ray players produced in 2016 at a price of 250 Euro each to private households
in Sunny; and puts all remaining 15,000 blu ray players produced but not sold in 2016 into its inventory. Those workers of
Plain Pictures who are nationals of Windy transfer 25,000 Euro of their 2016 income to private households in Sunny.
Suppose that in 2016 there are no further contributions involving Noisy Music or Plain Pictures to the GDP, national savings
and/or national wealth of Sunny and/or Windy.
a)
Using the product approach, calculate the year 2016 contributions of Plain Pictures to the GDP of Windy.
b)
Calculate the year 2016 contributions of Noisy Music and Plain Pictures to the level of (i) national saving of Sunny and of
Windy and (ii) national wealth of Sunny and of Windy.
Question 4
Tina is the sole owner of Tina’s Lawn Mowing, Incorporated (TLM). In one year, TLM collects $ 1,000,000 from customers
to mow their lawns. TLM’s equipment depreciates in value by $ 125,000. TLM pays $ 600,000 to its workers, who pay
$ 140,000 in taxes on this income. Some of these workers are originally from Mexico and sent $ 300,000 of their after-tax
income to their home country. TLM pays $ 50,000 in corporate income taxes and pays Tina a dividend of $ 150,000. Tina
pays taxes of $ 60,000 on this dividend income. She sent $ 20,000 to support her nephew studying abroad. TLM retains
$75,000 of earnings in the business to finance future expansion. How much does this economic activity contribute to each of
the following?
ˆ GDP
ˆ GNP
ˆ GNDP
Question 5
Green Engine GmbH is located in the Economy East, and at the beginning of the year 2020, had a capital stock worth
70,000 Euro. During 2020, Green The engine builds 200 electric engines, and its capital stock depreciates by 4,000 Euro.
The market value of each engine is 300 Euro. Green Engine’s costs for the production of each engine are the cost of labor
from workers who are residents of the East, 20 Euro; the cost of labor from workers who are residents of the economy West,
75 Euro; taxes, 10 Euro. Green Engine sells all 200 engines produced in 2020 to Quiet Vehicles AG (located in West). Also,
during 2020, the owners of Green Engine purchased 3,000 shares of the stock of Quiet Vehicles AG at a price of 10 Euros per
share. Finally, during 2020, the owners of Green Engine earned 5,000 Euro in interest payments on a savings account held
with a bank in the West (the balance on this account at the beginning of the year 2020 had been 75,000 Euro, and the only
transaction in this account that occurs during 2020 is the crediting of the 5,000 Euro interest payment).
Quiet Vehicles entered the year 2020 with a capital stock worth 250,000 Euro. During 2020, Quiet Vehicles built 200
motorcycles, and its capital stock depreciated by 20,000 Euro. The costs for the production of each motorcycle are: 300 Euro
worth of components from Green Engine; 500 Euro cost of labor from workers who are residents of West. Quiet Vehicles sells
5 of the motorcycles produced for 2,000 Euro to private households in East; it sells 105 of the motorcycles produced to private
households in West (also at 2,000 Euro per motorcycle). At the end of the year 2020, Quiet Vehicles puts all remaining 90
motorcycles produced but not sold in 2020 into its inventory.
How to calculate the year 2020 national savings as well as the national wealth at the end of the year 2020 of the economies
of East and West?
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Question 6
AAA
BBB
Computer
Production per
Price
Capita
(Local currency)
65
100
5
2,800,000
Hair cuts
Production
Price
per Capita (Local currency)
200
30
100
40,000
The table above illustrates the production per capita and prices of goods and services in two fictitious
countries, AAA (a rich country) and BBB (a poor country).
An international survey has recently found that a basket of 12 haircuts and 1 computer is the best representation of
production and consumption across countries. In the following questions, please use this information in your calculation.
a)
As of May 2018, the market exchange rate is that 1 unit of AAA’s currency (AAA$) can be converted to 28,000 units of
BBB’s currency (BBB$). Compute BBB’s GDP per capita in AAA$ using the market exchange rate. Show your work.
b)
Computing the PPP-based exchange rate between AAA$ and BBB$. Show your work. Compare this PPP-based exchange
rate with the market exchange rate. Please explain why there exists such a difference.
c)
Vietnam’s GDP in 2014 was 216 billion in current USD and 500 billion in PPP dollars. Please explain this deviation in terms
of purchasing power parity.
Question 7
Year
2014
2015
2016
Chicken
Quantity
2000
1500
1000
Product and Price
Beef
Price Quantity Price
3
500
6
2.5
1000
5.5
4
2000
8
Noodle
Quantity
2500
2560
2800
Price
2
1.8
2.3
The table above presents the development of prices and quantities produced in a fictitious country.
a) Compute the real GDP for the years 2014, 2015, and 2016 using the Laspeyres method. What is the limitation of this
approach?
b) Compute the real GDP for the years 2014, 2015, and 2016 using the Paasche method. What is the limitation of this
approach?
c) Compute the real GDP for the years 2014, 2015, and 2016 using the annual chain weight method. What is the reason
for employing this approach?
Question 8
In the country Simpleland, the following number of (newly produced) chicken wraps and smartphones were sold in 2014, 2015
and 2016 (no other goods or services were produced or sold): Calculate nominal and real GDP (the latter using the Laspeyres,
Paasche and Annual Chain Weight approaches) in Simpleland for 2015, 2016 and 2017. What explains the differences, if any,
between the real GDP numbers under the three different approaches?
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Chicken Wraps
Smart Phones
2015
2015 Price
2016
2016 Price
2017
2017 Price
Quantity
(Euro)
Quantity
(Euro)
Quantity
(Euro)
2000
5
2
450
2500
6
2.4
500
2800
10
2.5
550
Question 9
The table below presents the production per capita and the corresponding price level in two simplified, rich and poor
economies. The market exchange rate is 1 unit of the rich country’s currency = 25,000 units of the poor country’s currency.
Cars
Rich country
Poor-country
Production
per capita
100
5
Price
(In local currency)
100
30,000,000
Production
per capita
5000
250
Edcuation
Price
(In local currency)
20
5,000
a) Compute the GDP per capita for each country in domestic currencies.
b) What is the GDP per capita of the poor country in terms of the rich country’s currency, using the available market
exchange rate?
c) Compute the GDP of the poor country using the purchasing power parity (PPP) based method. Please provide the
rationale for this approach, using a standard basket of 5 Cars and 250 Education.