An economy produces three goods, medical care, military services and clothing. A
ID: 1188770 • Letter: A
Question
An economy produces three goods, medical care, military services and clothing. All goods and services employ labor and land to produce their products. Both medical care and military services buy $20 of clothing each.
Nominal Expenditures for Each Company
Calculate Nominal GDP using the expenditure method and the income method.
Medical
Military
Clothing
Total Wages (Labor) $
80
90
80
Total Rent (Land) $
60
100
10
Total Output $
300
250
150
Medical
Military
Clothing
Total Wages (Labor) $
80
90
80
Total Rent (Land) $
60
100
10
Total Output $
300
250
150
Explanation / Answer
Gross domestic product (GDP): This is the value of all finished goods produced by a country during a year.
Intermediary product value should not be included in GDP. Here intermediary product value is $20 of clothing utilized for medical and military services each. The total amount is ($20 × 2 =) $40.
GDP (Expenditure method) = (Consumption – Intermediary product value) + Investment + Government spending + (Import – Export)
= ($300 + $250 + $150 - $40) + 0 + 0 + 0
= $660 (Answer)
Profit = Output – (Labor + Land)
Profit of medical = $300 – ($80 + $60) = $160
Profit of military = $250 – ($90 + $100) = $60
Profit of clothing = ($150 - $40) – ($80 + $10) = $20
GDP (Income method) = Labor income + Rent income + Profit
= ($80 + $90 + $80) + ($60 + $100 + $10) + ($160 + $60 + $20)
= $660 (Answer)
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