Question

1. The table below provides information about the cost of inputs and value of output for the production of a road bike. Note there are four different stages of production.

Raw materials	Manufacturing	Construction	Sale by the retailer
Rubber for one tire ($20)	Tire maker sells tires for $30 each	Bike mechanic puts everything together and sells the bike for $345	Retailer sells the bike for $500
Aluminum for the frame ($80) Other component materials ($70)	Frame maker sells bike frame and components for a total of $225

Instructions: Round your answers to the nearest dollar.

a. What value is added by the supplier of the raw materials?

b. What value is added by the tire maker?

c. What value is added by the maker of the frame and components?

d. What value is added by the bike mechanic?

e. What value is added by the bike store?

f. What is the total contribution of the bike to GDP?

2. Suppose that the British economy produces two goods: laptops and books. The quantity produced and the prices of these items for 2015 and 2016 are shown in the table below:

Year	Quantities produced	Price ($)
2015	Laptops = 60 Books = 1,000	Laptops = 200 Books = ?
2016	Laptops = 80 Books = ?	Laptops = 90 Books = 12

Instructions: Round your answer to two decimal places.

a. Let’s assume that the base year was 2015, so that real GDP in 2015 equals nominal GDP in 2015.     

If the real GDP in Britain was $15,000 in 2015, the price of books was

Instructions: Round your answer to the nearest whole number.

b. Using your answer from part (a), if the growth rate in nominal GDP was 15 percent,  books must have been produced in 2016.

Instructions: Round your answer to one decimal place.

c. Using your answers from parts (a) and (b), the growth rate in real GDP between 2015 and 2016 was

Answer 1

1.

a. Value added by the supplier of raw materials = Price of the raw materials = $20 + $80 + $70 = $170

b. Value added by the tire maker = Price of a tire - Cost of raw materials pruchased(rubber) = $30 - $20 = $10

c. Value added by the maker of the frame and components = Price of a frame - Cost of raw materials purchased = $225 - ($8+$70) = $225 - $150 = $75

d. Value added by the bike mechanic = Price of the bike assembled by the bike mechanic - Cost of tires and frame = $345 - ($30 + $225) = $345 - $255 = $90

e & f. The data of the selling price of the bike by the bike store is missing in the given question and hence these can't be calculated

2.

Year	Quantities produced	Price ($)
2015	Laptops = 60	Laptops = 200
Books = 1,000	Books = ?
2016	Laptops = 80	Laptops = 90
Books = ?	Books = 12

Given, =

2015 is the base year &

Real GDP in 2015 = Nominal GDP in 2015 = $15,000

Real GDP in 2015 = Price of a Laptop in 2015 * Quantity of Laptops in 2015 + Price of a Book in 2015 * Quantity of Books in 2015 = $200*60 + $Pb * 1,000 = $12,000 +$1,000Pb

=> $12,000 +$1,000Pb = $15,000

=> $1,000Pb = $3,000

=> Pb = $3.00

Ans: Price of a book in 2015 = $3.00

b.

Given,

Nominal GDP growth rate between 2015-16 = 15%

Nominal GDP in 2016 = (1+15%) * Nominal GDP in 2015 = (1+0.15)*$15,000 = 1.15*$15,000 = $17,250

We know that,

Nominal GDP in 2016 = Price of a Laptop in 2016 * Quantity of Laptops in 2016 + Price of a Book in 2016 * Quantity of Books in 2016 = $90*80 + $12*Qb = $7200 + $12Qb

=> $7,200 + $12Qb = $17,250

=> $12Qb = $10,050

=> Qb = $10,050/$12

=> Qb = 837.5 = 838 units

Ans: Quantity of books produced in 2016 = 838 units

c.

Real GDP in 2016 = Price of a Laptop in 2015 * Quantity of Laptops in 2016 + Price of a Book in 2015 * Quantity of Books in 2016 = $200*80 + $3*838 = $18,514

Growth rate of real GDP = [(Real GDP in 2016 - Real GDP in 2015)/Real GDP in 2015] * 100 = [($18,514-$15,000)/$15,000] * 100 = [$3514/$15,000]*100 = 23.43%

Ans: Growth rate of Real GDP = 23.43%