Dokuz Eylül University 2021-2022 Spring Semester

Faculty of Business

Economics II - ECO1002
In-class Exercises (1)

1. Assume that there are five firms in an economy: a steel producer, a rubber producer, machine
tool producer, tire producer, and bicycle producer. In producing the bicycle, bicycle producer
buys tires from the tire producer (1000$), steel form the steel producer (2500$) and tools
from the machine tool producer (1800$). Also, the tire producer buys rubber from the rubber
producer (600$) and machine tool producer buys steel from the steel producer (1000$). The
bicycle producer sells his bicycles to the final consumer for 8000$.
a. Calculate GDP in terms of value added. Show your calculations.
b. Calculate GDP in terms of final expenditures. Show your calculations.

2. Given the data below compute the following for a country.

1. Personal interest payments 100

2. Transfer payments 50
3. Subsidies 100
4. Corporate profits 50
5. Incomes generated abroad by the country’s citizens 125
6. Incomes generated inside the country by foreigners 100
7. Personal consumption expenditure 600
8. Public consumption expenditure 400
9. Exports 200
10. Imports 150
11. Depreciation 150
12. Public Investment 200
13. Indirect taxes 50
14. Income taxes 200
15. Private Investment 400
16. Compensation of employees 1000
17. Rental income 300
18. Net interest 150
19. Proprietors’ income 25
20. Amount not going to households 125
a. GDP from expenditure approach
b. GDP by income approach, follow the steps:
i. National Income
ii. Net National Product
iii. GNP
iv. GDP (check whether you have found the same GDP in part a)
c. Personal income
d. Disposable income
e. Personal saving

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3. Which of the following transactions or activities would be counted in your country’s GDP?
Explain your answers.
a. A transportation company acquires a fleet of second-hand vehicles.
b. The same transportation company acquires 1.000 gallons of gas from a foreign company
deducted from the net export component of GDP.
c. You buy 10 short-term government bonds.
d. A mining company acquires new government licenses to drill in land the company already
owns.
e. You pay for a new haircut at your local hairdresser.
f. Foreign residents buy a bundle of your country’s food specialties on an online retail site.
g. Your parents spend a whole day cooking meal to be handed out to their poorer neighbors.
h. The local government acquires furniture for newly built schools.
i. Two telecommunications companies merge.
j. A non-profit organization buys an apartment to lodge their headquarters.
k. You receive a large sum of money as bequest from a dead relative.

4. Gorgonzola is a small island nation with a simple economy that produces only six goods:
sugar cane, yo-yos, rum, peanuts, harmonicas, and peanut butter. Assume that one quarter of
all the sugar cane is used to produce rum and one half of all the peanuts are used to produce
peanut butter.
2013 2014 2015
Product Quantity Price ($) Quantity Price ($) Quantity Price ($)
Sugar cane 240 0.80 240 1 300 $1.15
Yo-yos 600 2.50 700 3 750 4
Rum 150 10 160 12 180 15
Peanuts 500 2 450 2.50 450 2
Harmonicas 75 25 75 30 85 30
Peanut butter 100 4.50 85 4.50 85 5

a. Use the production and price information in the table to calculate nominal GDP for 2015.
b. Use the production and price information in the table to calculate real GDP for 2013, 2014,
and 2015 using 2013 as the base year. What is the growth rate of real GDP from 2013 to 2014
and from 2014 to 2015?
c. Use the production and price information in the table to calculate real GDP for 2013, 2014,
and 2015 using 2014 as the base year. What is the growth rate of real GDP from 2013 to 2014
and from 2014 to 2015?