1 Calculating GDP (30 Points) n economy with two firms. Firm A produces wheat an

Question

1 Calculating GDP (30 Points) n economy with two firms. Firm A produces wheat and firm B produces bread. In a , firm A produces 50,000 bushels of wheat, sells 20,000 bushels of wheat to firm B at S:3 , exports 25,000 bushels of wheat at $3 per bushel, and stores 5,000 bushels as inventory in wages to consumers. Firm B produces 50,000 loaves of bread, and sells all constumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition 000 loaves of bread consumers buy from firm B, consumers import and consume 15,000 given year, per bushel Firm A pays $50,000 loaves of bread, and they pay 81 per loaf for this imported bread. Calculate gross domestic product for the year using (a) the product approach (10 pts) (b) the expenditure approach (10 pts) (c) the income approach (10 pts)

Explanation / Answer

Ans.

A) Product approach

Firm A produces 50,000 bushels of Wheat and sells 20,000 bushels at the rate of $3 per bushel to firm B. That means Firm A is producing 50,000 bushels where price per bushel is $3. So Firm A production = 50,000*3 = $150,000. Whereas firm B produces 50,000 loaves of bread and price is $2 per loaf of bread. So Firm B production is of 50,000*2 = $100,000. Moreover the 20,000 bushels of wheat were sold to firm B to make bread at the price of $3 per bushel. That means firm B pays 20,000*3 = $60,000 to firm A . Since it is an intermediate input for firm B , the value added will be 100,000 - 60,000 = $40,000. Thus , GDP by production approach will be sum of production by firm A and production of firm B = 150,000 + 40,000 = $190,000.

B) Expenditure approach

Now, the consumers buy 50,000 loaves of domestically produced bread at the price of $2 per loaf as well as buy 15,000 loaves of imported bread at the price of $1 per loaf. So the consumption spending is 50,000*2 + 15,000*1 = 100,000 + 15,000 = $115,000. The firm A has kept inventory of 5,000 bushels of wheat. So price of wheat is $3 , that means investment is 5,000*3 = $15,000. Moreover, Firm A exports 25,000 bushels of wheat for $3 per bushel. So exports = 25,000*3 = $75,000. Whereas , imports are 15,000*1 = $15,000. Thus , net exports will be $75,000 - $15,000 = $60,000. SInce there is no government spending so it will be zero. Thus , GDP = consumption spending + investment + net exports = 115,000 + 15,000 + 60,000 = $190,000.

C) Income approach

Firm A pays $50,000 in wages and firm B pays $20,000 in wages. So total wages will be 50,000+ 20,000 = $70,000. FIrm A produces wheat of 50,000*3 = $150,000 and pays $50,000 in wages. That means firm A profits are $150,000 - $ 50,000 = $100,000. On the other hand, firm B produces bread of 50,000*2 = $100,000 and pays $20,000 in wages as well as pays $60,000 to firm A for buying wheat. So firm B profits are $ 100,000 - $ 20,000 - $ 60,000 = $20,000. That means total profits in an economy is of $100,000 + $20,000 = $120,000. Hence , total wage income is $70,000 and total profits are $120,000. GDP by income approach =$ 70,000 + $ 120,000 = $190,000

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