ABC Computer Co. has a $20,000,000 factory in Silicon Valley. During the current
ID: 1152941 • Letter: A
Question
ABC Computer Co. has a $20,000,000 factory in Silicon Valley. During the current year ABC builds $2,000,000 worth of computer components. ABC’s costs are labor ($1,000,000), interest on debt ($100,000), and taxes ($200,000). ABC sells all its output to XYZ SupercomputerCo. Using ABC’s components, XYZ builds four supercomputers at a cost of $800,000 each. This cost per computer is composed of $500,000 worth of components, $200,000 in labor costs, and $100,000 in taxes. XYZ has a $30,000,000 factory. XYZ sells three of the supercomputers for $1,000,000 each. At year’s end, it has not sold the fourth. The unsold computer is held by XYZ as inventory, with the hope they will sell it next year.1 (a) Using the expenditure approach, calculate the contribution to GDP of these transactions. (b) Using the income approach, calculate the contribution to GDP of these transactions. (Hint: you should know something about the answer you get to parts (a) and (b).) (c) Repeat parts (a) and (b), but now assume that in addition to its other costs, ABC paid $500,000 for imported computer chips from China.
Explanation / Answer
Expenditure Method:
Investment (Assume that the supercomputer is purchased by firms): $3,000,000
Change in Inventory: $800,000
________
GDP $3,800,000
Product Method: (Add value added of production)
ABC company:
Value added $2,000,000
XYZ company:
Value added $1,800,000
________
$3,800,000
Income Method:
ABC + XYZ
Wages: 1,000,000 + 800,000 = $1,800,000
Interest 100,000 + $100,000
Taxes 200,000 + 400,000 = $600,000
Profit 700,000 + 600,000 = $1,300,000
_________
$3,800,000
Answer B:-
Expenditure Method:
Investment (Assume that the supercomputer is purchased by firms): $3,000,000
Imports: - $500,000
Change in Inventory: $800,000
___________
GDP $3,300,000
Product Method: (Add value added of production)
ABC company:
Value added $1,500,000
XYZ company:
Value added $1,800,000
________
$3,300,000
Income Method:
ABC + XYZ
Wages: 1,000,000 + 800,000 = $1,800,000
Interest 100,000 + $100,000
Taxes 200,000 + 400,000 = $600,000
Profit 200,000 + 600,000 = $800,000
_________
$3,300,000