GDP Calculation Consider an economy with a corn producer, some consumers, and a
ID: 1167696 • Letter: G
Question
GDP Calculation
Consider an economy with a corn producer, some consumers, and a government. In a
given year, the corn producer grows 30 million bushels of corn ad the market price for corn
is $5 per bushel. Of the 30 million bushels produced, 20 million are sold to consumers,
5 million are stored in inventory, and 5 million are sold to the government to feed the
army. The corn producer pays $60 million in wages to consumers and $20 million in
taxes to the government. Consumers pay $10 million in taxes to the government, receive
$10 million on interest on government debt, and receive $5 million in Social Security
payments from the government. The prots of the corn producer are distributed to the
consumers.
1. Calculate GDP using i) the product approach, ii) the expenditure approach, and
iii) the income approach.
Explanation / Answer
a) Through production approach GDP is measured as
Gross value added = gross value of output – value of intermediate consumption, which is
Value of output = value of the total sales of goods and services plus value of changes in the inventories.
There are no intermediate goods inputs. The corn producer grows 30 million bushels of corn. Each bushel of corn is worth $5. Therefore, GDP equals $150 million.
(b) In Expenditure approach GDP is measured by the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).
Y = C + I + G + (X M)
Consumers buy 20 million bushels of corn, so con-sumption equals $100 million. The corn producer adds 5 million bushels to inventory, so investment equals $25 million. The government buys 5 million bushels of corn, so government spending equals $25 million. GDP equals $150 million
c) In income approach, GDP is the sum of primary incomes distributed by resident producer units.
wages = $60 million; profit = 90 million
gdp = $150 million
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