Modern Principles of Economics Fourth Edition Question 17 PLEASE ANSWER PART D AND E Let’s figure out GDP for Robinson Crusoe. a. Initially he is stuck on an island without the wisdom and local knowledge of Friday. Because Crusoe is a proper Englishman, he wants to keep his accounts. This year, he catches and eats 2,000 fish valued at one British pound (£) each, grows and eats 4,000 coconuts valued at £0.5 each, and makes 2 huts (housing) valued at £200 each. If government purchases are zero and there is no trade, what is C for Crusoe? What is I? What is Y? C = 2,000 (1) + 4,000 (0.5) = £4,000 I = 2(200) = £400 Y = C + I = 4,000 + 400 = £4,400
Modern Principles of Economics Fourth Edition Question 17
PLEASE ANSWER PART D AND E
Let’s figure out
a. Initially he is stuck on an island without the wisdom and local knowledge of Friday. Because Crusoe is a proper Englishman, he wants to keep his accounts. This year, he catches and eats 2,000 fish valued at one British pound (£) each, grows and eats 4,000 coconuts valued at £0.5 each, and makes 2 huts (housing) valued at £200 each. If government purchases are zero and there is no trade, what is C for Crusoe? What is I? What is Y?
C = 2,000 (1) + 4,000 (0.5) = £4,000
I = 2(200) = £400
Y = C + I = 4,000 + 400 = £4,400
b. One year, he learns of a tribe on a nearby island who are willing to trade with him: If he gives fish, they give clams. He produces just as much as before, but he trades 500 of the 2,000 fish and receives 10,000 clams valued at 5 clams per British pound. What is the British pound value of the exported fish? Of the imported clams? What are C, I, and NX now? What is GDP now?
Exports: 500(1) = £500
Imports: 10,000/5 = £2,000
C = 1,500 (1) + 4,000 (0.5) + 2,000= £5,500
I = £400
NX = exports - imports = 500 - 2,000 = -£1,500
GDP = C + I + NX = 5,500 + 400 - 1,500 = £4,400
c. The following year, Crusoe produces the same as in every other year, but a tribe on the other side of the island steals his two huts after he makes them, and gives him nothing in return. So he exports, but does not import at all. What are C, I, NX, and Y now?
C = 1,500 (1) + 4,000 (0.5) + 2,000= £5,500
I = £0
NX = exports - imports = (500 + 400) - 2,000= -£1,100
GDP = C + I + NX = 5,500 -1,100 = £4,400
d. In Crusoe’s final year on the island, he produces the same as in every other year (he’s a reliable worker), but a new shipwreck washes up on his island containing a clock worth £3, a new shirt worth £2, and a copy of Milton’s Paradise Lost and Shakespeare’s complete works, each worth £1. Treat these as imported consumer goods. What is GDP this year? (Note: Emphasize the “P” in GDP when considering your answer.) What are C, I, NX, and Y this year? (Note: One of the four is bigger than usual, one is negative.)
e. Is Crusoe probably happy about what happens in question 17c? Is he probably happy about what happens in question 17d? Keep these answers in mind for when we discuss the economics of trade later on.
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