ECON 227 Problems 1, Spring 2011

Econ 227: Intermediate Macroeconomics Problem Set #1 This assignment is due before class on Tuesday, March 1, 2011. 1. Consider the following economy with a petroleum refiner, a computer factory, a government, and consumers. The refiner produces 10M million liters of refined petroleum, which sell for $5 per liter. The factory produces 40 computers, which sell for $500,000. Of the 10M liters of petroleum, 6M are sold to con- sumers, 2M are sold to the factory to power their computers, and 2M are unsold. Of the 40 computers, the refiner buys 10 to expand capacity, the gov- ernment buys 20 to upgrade their surveillance technology, consumers buy 5, and the factory retains the rest. The government also spends $5 million in wages for surveillance professionals. This is financed by $1M in taxes from the refiner, $2M from the factory, and $1M from consumers. The factory and the refiner pay $6M and $40M in wages respectively, and the refiner pays $5M to consumers in interest on a loan. Calculate GDP by production, expenditures, and income. 2. Indicate which component or components of expenditures will be changed by the following transactions, how much they’ll change, and how much they’ll change Lebanese GDP. Suppose that cement costs $1M per ton. (a) A Lebanese cement company sells 10 tons of cement to a Lebanese con- struction company. (b) A Lebanese cement company sells 10 tons of cement to a Scandinavian construction company. (c) A Lebanese cement company produces 10 tons of cement but doesn’t sell it this year. (d) Next year, the Lebanese cement company sells the cement to a Lebanese construction company. Using the cement and labor, the Lebanese con- struction company builds an apartment building which it sells for $20M. Workers are paid $5M in wages. (e) A Lebanese cement company buys a pile driver from a Siamese pile driver manufacturer. 1 (f) A Lebanese cement company pays $1M to a Lebanese employment agency for labor services. (g) Lebanese cement enthusiasts buy 10 tons of cement from the Lebanese cement company. (h) Lebanese cement enthusiasts buy 10 tons of cement from a Turkish cement company. (i) A Lebanese shop buys 10 tons of cement from a Turkish cement company for its inventory. (j) The Lebanese shop sells these 10 tons of Turkish cement to Turkish tourists. 2