II. Consider five firms in the closed economy: a steel producer, rubber producer
ID: 1124105 • Letter: I
Question
II. Consider five firms in the closed economy: a steel producer, rubber producer, machine tool maker, tyre producer, and bicycle manufacturer. The bicycle manufacturer sells bicycles produced to final customers for $1600. In producing the bicycles, the firm buys tyres ($200), steel (S500), and machine tools (S360). The tyre manufacturer buys rubber ($120) from rubber producer and machine tool maker buys steel ($200) from the steel producer. Identify final and intermediate goods for the economy (a) Calculate the value of total sales; the value added by each firm and the total value added; the value of intermediate product of each firm and the value of total intermediate product; the total final expenditure, the value of GDP. (b) What is the relation between the value of total sales, the value of final product, the total value added and the value of intermediate product? Why would inclusion of final and intermediate goods in measuring GDP involve double accounting?Explanation / Answer
The bicycle is the final good while the tyres, steel and machine tools are intermediate goods in the economy because they are used in the production of final good bicycle.
a) Total value of sales = 1600.
Value added by the firms
Total value added = 80+160+700+120+540 = $1600
Value of total intermediate product = 80+160+700+120 = 1060
Total final expenditure is the expenditure on final goods = $ 1600.
The value of GDP = vale added at each stage = $1600.
b) The value of total sales is the income to producer. The value of final goods is the expenditure . The value of intermediate product is the value added.
Because the the value of intermediate goods is included by the final good