GDP Calculation Assume an economy with a coal producer, a steel producer, and so
ID: 1190832 • Letter: G
Question
GDP Calculation
Assume an economy with a coal producer, a steel producer, and some consumers (there is no government). In a given year, the coal producer produces 20 million tons of coal and sells it for 5$ per ton. The coal producer pays $50 million in wages to consumers. The coal producer stores 5 million tons of coal in inventory. The steel producer uses 25 million tons of coal as an input into steel production, all purchased at $5 per ton. Of this, 15 million tons of coal comes from the domestic coal producer and 10 million tons is imported. the steel producer produces 10 million tons of steel and sells it for $20 per ton. Domestic consumers buy 8 million tons of steel, and 2 million tons are exported. The steel producer pays consumers $40 million in wages. All profits made by domestic producers are distributed to domestic consumers
Calculate GDP using the expenditure approach and income approach
Explanation / Answer
Calculating GDP using expenditure method -
Consumer buys 8 million tons of steel at the rate of $20 per ton.
Private consumption expenditure = 8 million tons * $20 per ton = $160 million
Coal producer stores 5 million tons of coal in inventory. As coal producer generally stores 5 million tons of coal in inventory, his opening and closing stock has same value and thus inventory investment (closing stock - opening stock) is $0. Inventory investment is part of gross domestic capital formation. So, gross domestic capital formation is also $0.
10 million tons of coal is imported at the rate of $5 per ton and 2 million ton steel is exported at the rate of $20 per ton
Net exports = Exports - Imports = (10 million tons * $5 per ton) - (2 million tons - $20 per ton) = -$10 million
GDP = Private consumption expenditure + Gross domestic capital formation + Net exports
= $160 million + $0 million - $10 million
= $150 million
Thus, GDP by expenditure method is $150 million.
Calculating GDP using income method -
Coal producer pays $50 million as wages while steel producer pays $40 million as wages.
Total wages = wages paid by coal producer + wages paid by steel producer
= $50 million + $40 million
= $90 million
Coal producer sells 15 million tons of coal at $5 per ton.
Total sale value = $15 million * $5 per ton = $75 million
Coal producer $50 million as wages. He has no other cost. So, total cost is $50 million.
Profit = Total sale value - Total cost = $75 million - $50 million = $25 million
Steel producer sell 10 million tons of steel at the rate of $20 per ton.
Total sale value = 10 million tons * $20 per ton = $200 million
Stell producer purchased 25 million tons of coal at the rate of $5 per ton and has also paid $40 million as wages.
So,
Total cost = 25 million * $5 per ton + $40 million = $165 million
Profit = Total sale value - Total cost = $200 million - $165 million = $35 million
Total profit = Profit of coal producer + Profit of steel producer = $25 million + $35 million = $60 million
GDP = Total wages + Total profit = $90 million + $60 million = $150 million
Thus, GDP by income method is $150 million.
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