INTERMEDIATE MACROECONOMICS II
MIDTERM EXAM
1. Assume an economy with a coal producer, a steel producer, and some consumers (there is no government). In a given year, the coal producer produces 15 million tons of coal and sells it for $5 per ton. The coal producer pays $50 million in wages to consumers. The steel producer uses 25 million tons of coal as an input into steel production, all purchased at $5 per ton. Of this, 15 million tons of coal comes from the domestic coal producer and 10 million tons is imported. The steel producer produces 10 million tons of steel and sells it for $20 per ton. Domestic consumers buy 8 million tons of steel, and 2 million tons are exported. The steel producer pays consumers $40 million in wages. All profits made by domestic producers are distributed to domestic consumers.
(a) Determine GDP using (i) the product approach, (ii) the expenditure approach, and (iii) the income approach.
(b) Determine the current account surplus.
(c) What is GNP in this economy? Determine GNP and GDP in the case where the coal producer is owned by foreigners, so that the profits of the domestic coal producer go to foreigners and are not distributed to domestic consumers.
2. Assume an economy with two firms. Firm A produces wheat and firm B produces bread. In a given year, firm A produces 50,000 bushels of wheat, sells 20,000 bushels to firm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread, and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the 50,000 loaves of bread consumers buy from firm B, consumers import and consume 15,000 loaves of bread, and they pay $1 per loaf for this imported bread.
Calculate gross domestic product for the year using (a) the product approach, (b) the expenditure approach, and (c) the income approach.
3. Suppose that the depreciation rate increases. In the Solow growth model, determine the effects of this on the quantity of capital per worker and on output per worker in the steady state. Explain the economic intuition behind your results.
4. Suppose that the economy is initially in a steady state and that some of the nation’s capital stock is destroyed because of a natural disaster or a war.
(a) Determine the long-run effects of this on the quantity of capital per worker and on output per worker.
(b) In the short run, does aggregate output grow at a rate higher or lower than the growth rate of the labor force?
(c) After World War II, growth in real GDP in Germany and Japan was very high. How do your results in parts (a) and (b) shed light on this historical experience?