Consider an open economy with a mango producer, many consumers, and a government
ID: 1136252 • Letter: C
Question
Consider an open economy with a mango producer, many consumers, and a government. In a given year, the mango producer grows 100 million boxes of mango and the market price for mango is $4 per box. Of the 100 million boxes produced, 60 million boxes are sold to consumers, 10 million are stored in inventory, 20 million are sold to the government to feed the bureaucracy, and the remaining is exported to the rest of the world. The government does not provide national defense in this economy. The mango producer pays $120 million in wages to consumers and $80 million in indirect taxes to the government. Consumers pay $60 million in income taxes to the government, receive $10 million in interest on the government debt, and receive $30 million in unemployment insurance benefits from the government. Net factor payments from abroad are -$20 million. The consumers own the firm that produces mangos, so profits are distributed to consumers.
(a) Calculate the GDP using the product approach
(b) Calculate the GDP using the expenditure approach
(c) Calculate the GDP using the income approach. (Hint: Do not include interest on public debt here.)
(d) Calculate private sector saving (S P ), government saving (S G), and national saving (S). Is the government running a deficit or a surplus? Justify briefly.
Explanation / Answer
(A) GDP using product approach = Total value of all goods and services produced
= 100 million * $4 = $400 million
(B) GDP using expenditure approach = Consumption + Investment + Government Spending + Net Exports = 80 million * $4 + 0 + ($10 + $30) + 10 million * $4 = $400 million
(C) GDP using income approach = Total factor payments ( wages+ net factor income from abroad + profits + unemplyment insurance benefits + exclude interest on govt debt + indirect taxes)
= $120 + (-$20) + ($400 -$200) + $30 + (-$10) + $80 = $400 million
(D) Private sector savings = Income - expenditure(wages + taxes) = (90*$4) - ($120 + $80) = $160 million
Government savings = Income(taxes) - expenditure = ($80+ $60) - (20*$4 +$10 + $30) = $20 million
Government is running a SURPLUS as income is greater than expenditure.
National Savings = Private savings + Government savings = $180 million