Consider an economy with two firms and a government. Firm 1 produces 10000 units
ID: 1141975 • Letter: C
Question
Consider an economy with two firms and a government. Firm 1 produces 10000 units of good X, which it sells for $20 per unit. It uses this revenue to pay $140000 in wages, $10000 in taxes, and $10000 in interest on a loan, with the rest as profits. Firm 1 sells some of its output to consumers, and some to Firm 2 as an intermediate good in their production process Firm 2 uses good X as an input into its manufacturing process. It buys 8000 units of good X and uses them to create 1000 units of good Y, which it sells for $400 per unit. It pays $200000 in wages and $20000 in taxes, with the rest as profits. The government takes in taxes from only these two firms, and uses it to pay wages to provide government services, for instance national defense. a) Calculate GDP using the three different methods. Of course, you'll arrive at the same answer; however, indicate clearly what values you're using in each case to arrive at the final answer, so as to illustrate you know what is included in each method of calculating GDP. 1)Income approach: 2)Expenditure approach: 3)Product(value-added) approach:Explanation / Answer
1) (Income approach) GDP = wages + interest + profits + taxes(paid as wages) = ($140000 + $200000) + $10000 + ($40000 + $20000) + $10000 + $20000 = $4,40,000
NOTE - profit of firm 1 = 10000*$20 - $140000 - $10000 - $10000 = $40,000
profit of firm 2 = 1000*$400 - 8000*$20 - $200000 - $20000 = $20,000
2) (Expenditure approch) GDP = consumption = 2000*$20 + 1000*$400 = $4,40,000
3) (Product approach) GDP = value of final goods and - value of intermediate goods= 1000*$400 + 10000*$20 - 8000*$20 = $4,40,000