Determine the value added by each person.

  1. The following transactions occurred in a given year. Firm A manufactures leather using a

factory valued at $20,000. Suppose Firm A produced $2,000 worth of leather and incurred

the following costs: $1,000 for the salaries of workers, $100 for interest payments on a

bank  loan,  and  taxes  of  $200.  Firm  A  sold  all  of  its  leather  to  Firm  B,  which  is  a

manufacturer of luxury bags. Suppose Firm B produced four bags at a cost of $800 each.

The cost of each bag consisted of paying for $500 worth of raw materials, paying for the

salaries of workers for $200, and $100 in taxes. Firm B has a factory valued at $30,000.

Firm B sold to the public three of its four bags for $1,000 each. Calculate the contribution

to GDP using the following:

1)  Production approach.

2)  Income approach.

3)  Expenditure approach


2 .   Consider a two-good (A and B), two-period (year 1 and year 2) economy. In year 1, the

economy produced 10 units of A at a per unit price of $1 and 5 units of B at a per unit price

of $2. In year 2, the economy produced 15 units of A at a per unit price of $1 and 5 units

of B at a per unit price of $3. Calculate real GDP for years 1 and 2 using the following


1)  Laspeyres.

2)  Paasche.

3)  Fisher.

4)  Calculate and compare the growth rate of real GDP using the three approaches.


  1. 3. Mankiw, page 42, question 2. A farmer grows a bushel of wheat and sells it to a miller for

$1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The

baker uses the flour to make bread and sells the bread to an engineer for $6. The engineer

eats the bread.

1)  What is the value added by each person?

2)  What is the bread’s contribution to GDP?


  1. Mankiw, page 42, question 3. Suppose a woman marries her butler. After they are married,

her husband continues to wait on her as before, and she continues to support him as before

(but as a husband rather than an employee).


1)  How does the marriage affect GDP? (Note: That is, the butler is treated as a husband,

not as an employee)

2)  How should it affect GDP? (Note: That is, the butler is treated as an employee, not as

a husband)

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