Sabancı Üniversitesi SUMMER 2018 Faculty of Arts and Social Sciences Remzi Kaygusuz

Economics 202 Homework #1

Due: Thursday, July 5, at the beginning of lecture. Instructions: Please show all work or points will be taken off. 1. Consider an economy that produces only two goods: cotton and shirt. In this economy, the technology of producing shirts involves using cotton as an input. CottonInc is the only company that produces cotton, while T’S is the only producer of shirts. The relevant revenue and cost information for each of the two firms in the economy is given below: T’S Revenue from selling shirts: 130000TL Cost of buying cotton from Mehmet Ağa: 50000 Interest on funds borrowed to buy machines: 8000 Wages paid to employees 32000 Taxes 10000 CottonInc Revenue from cotton: 50000 TL Rent on land (including mineral rights) 7000 Wages to employees 9000 Taxes 3600 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 2013. (All numbers are in billions of current dollars.) Gross domestic product = 12000 Total Private Household Consumption = 9000 Net Exports = –4500 Government Spending = 5250 Tax Revenue of Government = 3750 Transfer Payments = 750 Interest Payments = 750 Net Factor Payments = 150 a.) Calculate the level of investment for this economy. b.) Calculate the government’s budget deficit for this economy. c.) Calculate private saving for this economy.

d.) Calculate the value of the current account for this economy. e.) Calculate national saving for this economy 3. The economy of SULand has produced the following quantity of wheat and potatoes, with the price of each listed in dollar terms. (a) Using 2012 as the base year, what is the growth rate of real GDP from 2012 to 2013? (b) Based on the GDP deflator, what is the inflation rate from 2012 to 2013? 4. For the purposes of assessing an economy’s growth performance, which is the more important statistic: real GDP or nominal GDP? Make sure you include a detailed explanation as part of your answer.

Year 2012 2013 Quantity Price Quantity Price Wheat 40,000 4.00 48,000 6.00 Potatoes 32,000 1.20 28,000 1.60

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