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Consider an economy in which the following activities occur during a given year: (Total 10 points)

A steel company pays its workers $95,000 to mine iron ore and process it into 1000 kilograms of steel.

A car manufacturer purchases the steel for $113 per kilogram and pays its workers $27,000 to produce 38 cars, which it sells to final consumers for $6,300 per car.

a) What is the value-added by each of these activities?

b) What is the sum of incomes earned in this economy?

c) What is the value of final goods produced in this economy?

d) What is GDP in this economy?

e) Suppose that in the next year, the quantities of steel and cars are the same, wages paid by both companies are the same, but the price of steel is now $128 per kilogram and the price of a car is $5,900. What is the nominal GDP in the next year? What is the growth rate of real GDP between the first year and the next?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

Answer Part D only:

4. 10 points In year 1 and year 2, there are two products produced in a given economy, cars and beef. Suppose that there are no intermediate goods. In year one, 200 cars are produced and sold at $15,000 each, and in year two, 250 cars are sold at $16,000 each. In year one, 1,000,000 pounds of beef are sold for $7.00 each, and in year two, 1,000,000 pounds are sold for $8.00 each.

(a) Calculate nominal GDP in each year.

(b) Calculate real GDP in each year and the percentage increase in real GDP from year 1 to year 2 using year 1 as the base year. Next, do the same calculations using the chain-weighting method.

(d) Suppose that cars in year 2 are better than cars in year 1. That is, cars are of higher quality in year 2 in the sense that one car in year 2 is equivalent to 1.2 cars in year 1. How does this change your calculations in parts (a) to (c)? Explain any differences.

In 2003, China became the world's largest importer of iron ore. Between 2004 and 2005, China's steel production increased from by 26% from 270 to 340 million metric tons, or about one-third of world production. Fueled by rapid economic growth, production was projected to increase by a further 9% to 370 million tons in 2006. Iron ore is graded as fine and lump according to whether the majority of individual's particles have diameter of less or more than 4.75 millimeters. A third grade-pellets- is fined grained concentrate rolled into balls with diameter of 9.55 to 16.0 millimeters. Lump ore and pellets can be charged directly to a blast furnace, hence are most costly to use. Three companies- Australia's BHP and Rio Tinto, and Brazil's Companhia Vale do Rio Doce (CVRD)- control over 70 percent of worldwide exports of iron ore. By 2005, China purchased over 40% of world iron ore imports. Europe and Japan bought less than 25% and 20% respectively, in 2004, the principal sources of China's iron ore imports were Australia (78 million tons), India (50 million tons), Brazil (46 million tons), and South Africa (11 million tons). China imports a total of 5.7 million from other sources including Canada, Russia, and the USA, in 2005, China's import comprised 71% fine ore, 19% pellets, and 10% lumps. China imports of iron ore from India have been so large that Indian steel manufacturers lobbied their government to limit exports to China. To meet the burgeoning demand from China, BHP Billiton increased production by 45% from 72 million tons to about 105 million tons in just three years, 2002-05. Smaller Australian mining companies have also increased production capacity. These include Atlas Iron Ore, Fortescue Metals Group, Gindalbie Metals, Midwest Iron and Steel, Resource Mining Corporation, Golden West Resource, and Polaris. The big three iron one producer has entered into long-term supply contracts with major steel manufacturers. These contracts might specify minimum quantities that the ore producer must sell and the manufacturer must purchase. Steel manufacturers buy on free-on-board (FOB) basis. FOB buyers pay for freight. These contracts further specify that prices must be negotiated on an annual basis. European steel manufacturers buy relatively more fine ore. Prices for fine ore set the benchmark for prices for lump ore and pellets. The China Iron and Steel Association represent sixteen of China's major steel manufacturers in negotiation with iron ore producers. The association includes Baoshan Iron and Steel, which imports all of its iron ore, Maanshan Iron and Steel, which imports 75% of its iron ore, Chongqing Iron and steel, which imports 60 % and Angang New Steel, which imports relatively little iron ore. In late 2004, Nippon Steel of Japan agreed a substantial price increase with CVRD. Subsequently, CVRD and Rio Tinto negotiated a sharp 71.5% price increase with the China Iron and Steel Association for shipments in 2005-06. BHP Billiton calculated that the freight cost of shipping iron ore from Australia to China was about US $20 per ton less than shipping from Brazil. Accordingly, BHP sought a US$7.50 to $10 per ton surcharge from the China Iron and Steel Association in addition to the 71.5% price increase. The association rejected the surcharge as unreasonable and against international practice. China's Ministry of Foreign Affairs declined to intervene, saying that negotiation between BHP and Chinese steel manufacturer were commercial issue. However, China's Deputy Commerce Minister Ma Xiuhong remarked that BHP's surcharge would damage long-term relations between China and Australia. Meeting with resistance from the China Iron and Steel Association, BHP dropped its demand for the surcharge. However, Mr. Graeme Hunt, President of BHP Billiton Iron Ore, said that would raise the issue in the following year. Subsequently, BHP Billiton announced an 89% jump in profit to $6.4 billion for the year to June 2005, which was a record for an Australian company. China sales accounted for 12.6% of total revenue. BHP agreed to co-sponsor the 2008 Beijing Olympic Games by contributing money as well as golf, silver, and bronze for medals. Mr. Clinton Dines, President of BHP in China, said that the co-sponsorship would not dissuade BHP from re-opening discussions of surcharge. Meanwhile, Rio Tinto's profit increased 58% from $3.3 billion in 2004 to a record $5.2 billion in 2005. China sales accounted for 15% of total revenue.

Discussion question:

1. Why would steel manufacturers and iron ore suppliers agree to minimum purchases/sales in long-term contracts?

2. What advantage(s) would BHP Billiton gain by pricing steel manufacturers on a CIF (cost insurance and freight) rather than FOB basis?

3. What advantage(s) do Chinese steel manufacturers gain by negotiating jointly with iron ore suppliers?

4. How can Chinese steel manufacturers improve their bargaining position relative to BHP Billiton?

1) In years 1 and 2, there are 2 goods produced in a given economy, hamburgers, and pens. In year 1,

10,000 hamburgers are produced and sold at $2 each, and in year 2, 40,000 hamburgers are produced

and sold at $2.10 each. In year 1, 15,000 pencils are sold for 2 dollars each, and in year 2, 38,000

pencils are sold for $3 each.

a)Calculate nominal GDP in years 1 and 2.

b)Calculate real GDP in years 1 and 2 using year 1 as the base year. Next, calculate the percentage

increase in real GDP from year 1 to year 2.

c)Calculate the GDP deflator and the percentage inflation rate from year 1 to year 2 using year 1

as the base year.

d)What is the CPI inflation rate using year 1 as the base year? Is this equal to the GDP deflator

inflation rate?

2. Now, in the above economy, also suppose that 8,000 notebooks were imported and sold for $1 each

in year 1, and 20,000 notebooks imported and sold for $5 each in year 2

a)Calculate nominal GDP in years 1 and 2.

b)What is the CPI inflation rate using year 1 as the base year?

c)What is the GDP deflator inflation rate using year 1 as the base year?

d)Are the two measures equal? Yes or No? And explain.

e)If the price of imported notebooks increases to $10 in year 3, how would this affect the CPI

inflation rate? How about the GDP inflation rate? Explain, but no need to show work.

3. Consider an economy that initially has a labor force of 2000 workers. Of these workers, 1500 are

employed. The economy enters a recession. Employment falls by 5%, and also, 0.4% of the

labor force becomes discouraged at the prospect of finding a job and leaves the labor force.

a)Can you calculate the employment rate given the information above? Explain.

b)Calculate the unemployment rate before and after the recession.

c)What is the unemployment rate taking discouraged workers into account?

d)Using Okun's law, calculate the expected percentage change in real GDP.

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