Consider an economy that produces only two goods

1. Consider an economy that produces only two goods: fresh apricots and dried apricots. In this economy, the technology of producing dried apricots is to place fresh apricots on special racks and allow them to dry in the sun. Fannie’s Farms is the only company that grows fresh apricots, while Darryl’s Dried Victuals is the only producer of dried apricots. Fannie’s sells some of its apricots directly to consumers for consumption. The relevant revenue and cost information for each of the two firms in the economy is given below:


Revenue from selling dried apricots: $2,300,000
Cost of buying fresh apricots from Fannie’s: 1,200,000
Interest on funds borrowed to buy drying racks: 250,000
Wages paid to employees 600,000
Taxes 100,000


Revenue from selling fresh apricots: $2,000,000
Rent on land (including apricot trees) 300,000
Wages to employees 1,200,000
Taxes 200,000

Calculate nominal GDP using (a) the expenditure approach (b) the production (value added) approach, and (c) the income approach and show that all three give the same answer.

2. The following data are given for a country in 2005. (All numbers are in billions of current dollars.)
GDP = $1,400
C = $1,100
NX = –$300
G = $500
T = $400
TR = $200
INT = $100
NFP = $50

a.) Calculate the level of investment (I) for this economy.

b.) Calculate the government’s budget deficit (–Sgovt) for this economy..

c.) Calculate private saving (Spvt) for this economy.

d.) Calculate national saving (S) for this economy

3. Suppose that you buy a one-year government bond on January 1, 2004 for $1,000. You receive principal plus interest totaling $1,070 on January 1, 2005. The CPI was 150 on January 1 2005. Imagine that you expected that the CPI would be 156 on January 1, 2005. However, it turned out that the CPI was 159 on January 1, 2005.

a) Find the nominal interest rate, the inflation rate, and the real interest rate (the actual, ex-post real interest rate).

b) What was your expected real rate of interest? Why did your expected real rate of interest differ from the actual real rate of interest? Explain.

4. Consider Country T whose economy produces only three items, Tomatos, Tofu, and Tacos. The base year is arbitrarily chosen as 2004

2004 2005
Good Quantity Price Quantity Price
Tomatoes 1000 $1.00 1200 $1.50
Tacos 2000
600 $3.00
$5.00 1800
500 $4.00

a. Find nominal GDP in the current year (2005) and in the base year. What is the percentage increase since the base year?

b. Find real GDP in the current year (2005) and in the base year. By what percentage does real GDP increase from the base year to the current year (2005)?

c. Find the GDP deflator for the current year (2005) and the base year. By what percentage does the price level change from the base year to the current year (2005)?

d. Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in the physical volume of output?

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