Problem 7 The small economy of Pizzania produces three goods (bread, cheese, and
ID: 1133968 • Letter: P
Question
Problem 7 The small economy of Pizzania produces three goods (bread, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all the inputs they need to make bread and cheese, respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labor to help produce their goods, and the difference between the value of goods sold and the sum of labor and input costs is the firm's profit. The accompanying table summarizes the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas. Answer the following questions and show your work. Bread Company Cheese Company Pizza Company S50 (Bread) $35 (Cheese) $75 $200 SO SO $20 $35 Cost of inputs Vages Value of Output $50 (1) Calculate GDP as the value added in production. (2) Find GDP as spending on final goods and services (3) Calculate GDP as factor income (4) Compare your answers to (1), (2) and (3) and what is your finding?Explanation / Answer
Answer:
1) Value added is the difference between the cost of input and price of output at various stages of production .
Here GDP = value of ouptput- cost of input in all stages = ( 50-0) + ( 35-0) + [200-(50+35)] = 50 +35+115= 200units
2) This is the expenditure approach . It is sum of all final good and services purchased in an economy .
GDP = 200 units
The only final good is pizza here . Others are used as inputs in pizza production .
3) In this approach or income approach we add up wages , rents , interest , profit etc .
GDP = Profit + Wages =[ ( 50-15) + (35-20) +( 200 - (50+35+75)] + ( 15+20+75) = 35+15+40 + 110 = 200 units
The underlined part is profit which we get by substracting total input cost and wages from value of product .
4) We found that the value of GDP is same by all three approaches .