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Question: Consider an economy consisting of only two companies: Oil Inc. and Electricity Inc. Electricity I...
Consider an economy consisting of only two companies: Oil Inc. and Electricity Inc. Electricity Inc. buys $400 worth of oil from Oil Inc. and uses it to produce electricity. It is owned by US nationals, its plant is based in the US, and its workers are all US nationals. It receives $1000 in revenue from the sale of electricity to the public (domestic) and has to pay $500 in wages. Oil Inc. is owned by US nationals and it operates two different oil extraction plants, one at home and the other in Saudi Arabia. The domestic plant pays $400 in wages to domestic workers and produces $2000 worth of oil. Out of this production $1600 is sold directly to the public domestically and $400 is sold to Electricity Inc. The foreign plant employs only foreigners. Its total wage bill is $300. It produces $1300 worth of oil out of which $500 is sent back to the US and sold to the public and the remaining $800 is sold in Saudi Arabia.
A. The value added by Electricity Inc. is dollars.
B. The value added by the domestic arm of Oil Inc. is dollars.
C. US GDP is dollars.
D. The value of US imports is dollars.
E. Consumption expenditure of the US economy is dollars.
F. US Corporate Profits equal dollars.
G. Factor payments from abroad is dollars.
H. National Income for the US economy is dollars.
I. Assume for a moment that the foreign plant of Oil Inc. employs only US nationals and the domestic plant employs only foreign nationals. The change in the value of US GDP as a result is . J. Assume for a moment that the foreign plant of Oil Inc. employs only US nationals and the domestic plant employs only foreign nationals. US National Income would then be .
Explanation / Answer
W is the wages 900,
R stands for rental income 400,
Interest Income is I and is 500,
PR are business profits and is 3000.
Income Approach: NI= W + R + I + PR
900 + 400+ 500+ 3000 = 4800
Expenditure approach:
GDP = Consumption + Investment + Government spending + Net export = $1000(Total revenue from Electricity Inc. falls to consumption) + $1600(Total revenue from Oil Inc.’s domestic plant falls to consumption) = $2600.
Product approach:
$1000(Total value of product from Electricity Inc.) + $1600(Total value of product from Oil Inc.’s domestic plant minus value of product sold to Electricity Inc.) = $2600.
Although the workers are changed to foreigners GDP is related to the location of production so the value will not change.
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