Binsula, Kinsula and Tinsula are three small islands. The only final goods produced are books (B), jeans (J) and wine (W), and suppose each island has its own currency (denote PB the peso of Binsula, PR the peso of Rinsula and PT the peso of Tinsula). Next table contains the quantities and prices of the commodities produced in each island in 2014 (all measured in local currency). BJ W Price B Price J Price W 1,000 20 200 5 25 0.5 80 300 5,000 10 60 2 300 300 3,000 1 4 0.1 a) Compute GDP of each island in local currency. b) Suppose the exchange rate of each currency relative to the dollar is (PB/$)=0.8, (PR/$)=2.88 and (PT/$)=0.15 and compute the value of GDP in each island, all expressed in dollars. c) Compute the relative prices of books and jeans in terms of wine in each island. d) Obtain a measure of GDP in each island expressed in units of wine. Exercise 5: Production and income distribution 9K1/3L2/3 where Consider and economy with the following production technology: Y = the aggregate capital stock is K-100, and aggregate labor is L=100. The price of output is 1. a) Write down the maximization problem of the firm. b) Compute the equilibrium wage and capital return. c) Compute total payments to labor and capital. Show Euler's Theorem holds, i.e. show that total payments to capital and labor equal the value of output. d) What share of output goes to labor and capital? e) Suppose there is an increase in L, what would be impact on wages and capital returns?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Binsula, Rinsula and Tinsula are three small islands. The only final goods produced are books (B), jeans (J) and wine (W), and suppose each island has its own currency (denote PB the peso of Binsula, PR the peso of Rinsula and PT the peso of Tinsula). Next table contains the quantities and prices of the commodities produced in each island in 2014 (all measured in local currency). B J W Price B Price J Price W 1,000 20 200 5 25 0.5 80 300 5,000 10 60 2 300 300 3,000 1 4 0.1 a) Compute GDP of each island in local currency. b) Suppose the exchange rate of each currency relative to the dollar is (PB/$)=0.8, (PR/$)=2.88 and (PT/$)=0.15 and compute the value of GDP in each island, all expressed in dollars. c) Compute the relative prices of books and jeans in terms of wine in each island. d) Obtain a measure of GDP in each island expressed in units of wine.

Exercise 4: National accounting and international comparisons
Binsula, Rinsula and Tinsula are three small islands. The only final goods produced are
books (B), jeans (J) and wine (W), and suppose each island has its own currency (denote
PB the peso of Binsula, PR the peso of Rinsula and PT the peso of Tinsula). Next table
contains the quantities and prices of the commodities produced in each island in 2014 (all
measured in local currency).
B
J W
1,000 20 200
80 300 5,000
300 300 3,000
Price B Price J Price W
5
25
10
60
1
4
0.5
2
0.1
a) Compute GDP of each island in local currency.
b) Suppose the exchange rate of each currency relative to the dollar is (PB/$)=0.8,
(PR/$)=2.88 and (PT/$)=0.15 and compute the value of GDP in each island, all
expressed
in dollars.
c) Compute the relative prices of books and jeans in terms of wine in each island. d)
Obtain a measure of GDP in each island expressed in units of wine.
Exercise 5: Production and income distribution
Consider and economy with the following production technology: Y = 9K¹/3L2/3 where
the aggregate capital stock is K=100, and aggregate labor is L=100. The price of output is
1.
a) Write down the maximization problem of the firm.
b) Compute the equilibrium wage and capital return.
c) Compute total payments to labor and capital. Show Euler's Theorem holds, i.e. show
that total payments to capital and labor equal the value of output.
d) What share of output goes to labor and capital?
e) Suppose there is an increase in L, what would be impact on wages and capital returns?
Explain.

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Gross domestic product (GDP) is the standard computation of the value added created through the production of products and services in a nation during some period. As such, it also computes the income earned from that production, or the total amount spent on final products and services (minus imports).

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