Consider an economy consisting of exactly two firms A and B. Firm A sells Good X
ID: 1150242 • Letter: C
Question
Consider an economy consisting of exactly two firms A and B. Firm A sells Good X to Firm B and to the public. Firm B produces and sells Good Y for which Good X is an input. Each firm’s costs and revenues for one year are given below.
Firm A
Wages = 25,500
Taxes = 7,500
Sales of X to Public = 15,500
Sales of X to Firm B = 29,000
Firm B
Wages = 35,000
Taxes = 7,000
Sales of Good Y to Public = 69,000
Purchase of Good X From Firm A = 29,000
a) Use the valueadded approach to calculate GDP for this economy
b) Use the income approach to calculate GDP for this economy
c) Use the expenditure approach to calculate GDP for this economy.
d) Now suppose that the production of Good X imposes pollution that is valued at $30,000. Given GDP accounting methods, would this reduce calculated GDP?
Explanation / Answer
Answer a : Calculation of GDP with Value added Method :
Firm A (Final Goods and services selling in the market) = 15,500
Firm B ( Final goods and services in the market ) = 69000
GDP with value added method of whole economy = 84,500
Answer b : Income approach
Firm A (Profit) = Revenue -Expenses = 44,500- 25,500-7500 =11500
Firm B (Profit) = Revenue -Expenses = 69000- 29000- 35000-7000 =(2000)
Wages = 60,500
Taxes = 14,500
Total GDP of an country = 11500-2000+60500+14500 = 84,500
Answer c : Expenditure method :
Total GDP of an economy =Consumpation of good X + Consumpation of good Y = 15,500+69000 = 84,500
Answer d : When pollution has been emited by the good X than the cost has been beared by the company that decrease there profit which resulted in declined in GDP as per income method because there profit has been reduced in an economy.So the final GDP after emission of pollution is 54,500.