Question 1 Assume a small scale French farmer sells 100,000 lbs. of milk to a French intermediary company for รขยยฌ2.00 per lbs. The intermediary company package the milk in fancy containers and sells it to Danone for รขยยฌ3.50 per lbs. Danone uses the milk to produce yogurt in its plant in Seville, Spain, Total output will be 6000 container and each container of yogurt for รขยยฌ5.75. How will this string of transactions affect French GDP? How will it affect French GNP? How will it affect Spanish GNP and GDP? Which will be more reflective of the true output for each economy? Explain
Question 2
Consider an open economy described by the following equations (all figures in millions of dollars): Y = C + I + G + NX Y = 8,000 (current value of output) G = 2,000 T = 1,000 + .1(Y) C = 450 + 0.75 (Y รขยย T) I = 2,000 รขยย 40 r NX = 700- 600รย (รย is the exchange rate) r = r* = 5 a) What is the current state of this economy in term of national saving, investment, the trade balance and the equilibrium exchange rate? b) Suppose government approve an infra structure investment which raises G to 2,250. How would this increase impact what you have calculated in (a) above? c) Now suppose that the world interest rate rises from 5 to 10 percent (G is again 2,000). Would the change in interest have the same impact on National saving and investment? Does it impact the exchange rate? Explain