Question 1: Gross Domestic Product (30 points) J Consider an economy that produc

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Question 1: Gross Domestic Product (30 points) J Consider an economy that produces three goods, apples, apple juice and apple pies. The prices e of apples, apple juice and apple pie are $1, $5 and $7, respectively. In order to produce one unit of apple juice, three units of apples are required. To produce one unit of apple pie wie need four apples. The economy produces 200 units of apples, 20 units of apple juice and 10 units of apple pie. The government buys 5 apple pies and 5 units of apple juice. Consumers buy 50 apples, 5 units of apple juice and 5 units of apple pie. The economy exports 20 units of apples and 10 units of apple juice. For each good, what is not consumed is kept as inventories. The equilibrium wage in the economy is 10 and the apple sector employs 5 workers, the juice sector employs 4 workers and the pie sector employs 3 workers (a) Compute the GDP using the production approach. What is the added value in the juice sector and in the pie sector? (b) Compute the GDP using the expenditure approach. Be explicit about each one of the component of expenditure. (c) Compute the GDP using the income approach.

Explanation / Answer

a) GDP using production approach = Total value of output in the economy- total cost of producing output

Here total value of output in the economy = 200*$1+20*$5+10*$7= $370

Total labor cost = (5+4+3)*$10= $120

Total input cost of producing apple juice and apple pie = 20*$3 + 10*$4= $100 (Since price of apple = $1 and for producing one unit of apple juice 3 apples are needed and for producing one unit of apple pie, 4 apples are required)

Therefore, GDP using production approach = $370-$120-$100=$150

Total added value in the apple juice sector = 20*$5-20*$3-$40=0

total added value in the apple pie sector = 10*$7- 10*$4-$30=0

b) GDP using expenditure approach= Total consumption + Government spending+ Investment +Net export(Exports-Imports)

Here total consumption value = 50*$1+5*$5+5*$7= $110

Government spending or purchase value = 5*$7+5*$5= $60

Investment = 0

Total Export value = 20*$1+10*$5= $70

Therefore, GDP using expenditure approach = $110+$60+$0+$70= $240

c) GDP using income approach = Total wages + Income received from exports = $50+$40+$30+ $70= $190

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