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20 February, 02:54

Assume an economy with two rms. Firm A produces wheat and rm B produces bread. In a given year, rm A produces

50,000 bushels of wheat, sells 20,000 bushels to rm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and

stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread,

and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the

50,000 loaves of bread consumers buy from rm B, consumers import and consume 15,000 loaves of bread, and they pay

$1 per loaf for this imported bread. Calculate gross domestic product for the year using

(a) the product approach,

(b) the expenditure approach, and

(c) the income approach.

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Answers (1)
  1. 20 February, 03:29
    0
    (a) Product approach;

    The value of Firm A's production 50,000 * $3=$150,000.

    The value of Firm B's production 50,000 * $2 = $100,000.

    Firm B pays $60,000 to firm A for 20,000 bushels of wheat, which is an intermediate input. Firm B's value added is therefore $40,000. GDP is therefore equal to $190,000.

    (b) Expenditure approach:

    Consumers buy 50,000*$2/loaf and 15,000*$1/loaf.

    Consumption spending is therefore equal to $100,000 + $15,000 = $115,000.

    Firm A adds 5,000 bushels * $3 = $15,000.

    Firm A exports 25,000 * $3 = $75,000.

    Consumers import 15,000 * $1=$15,000.

    Net exports are equal to $75,000 - $15,000 = $60,000. There is no government spending. GDP is equal to consumption ($115,000) plus 3 investment ($15,000) plus net exports ($60,000). G

    DP = $190,000.

    (c) Income approach:

    Firm A pays $50,000 in wages + Firm B pays $20,000 in wages = $70,000. Firm A produce $150,000 - $50,000 in wages=. $100,000 profits.

    Firm B produces $100,000 - $20,000 in wages - $60,000 to Firm A for wheat=$20,000 profits

    Total profit income in the economy equals $100,000 + $20, 000 = $120,000. Total wage income ($70,000) plus profit income ($120,000) equals $190,000. GDP is therefore $190,000.
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