Consider an economy in which the following activities occur during a given year:
ID: 1200775 • Letter: C
Question
Consider an economy in which the following activities occur during a given year: (Total 10 points)
A steel company pays its workers $95,000 to mine iron ore and process it into 1000 kilograms of steel.
A car manufacturer purchases the steel for $113 per kilogram, and pays its workers $27,000 to produce 38 cars, which it sells to final consumers for $6,300 per car.
a) What is the value added by each of these activities?
b) What is the sum of incomes earned in this economy?
c) What is the value of final goods produced in this economy?
d) What is GDP in this economy?
e) Suppose that in the next year, the quantities of steel and cars are the same, wages paid by both companies are the same, but the price of steel is now $128 kilograms and the price of a car is $5,900. What is nominal GDP in the next year? What is the growth rate of real GDP between the first year and the next?
Explanation / Answer
a) The value added by purchasing the steel = 1000X $ 113 - $ 95,000
The value added by purchasing the steel = $ 18,000
The value added by sales of cars = 38 X $ 6300 - $ 113,000
The value added by sales of cars = $ 126,400
b) The sum of incomes earned in this economy = $ 95,000 + $ 27,000
The sum of incomes earned in this economy = $ 122,000
c) The value of final goods produced in this economy = 1000X$ 113 + $ 6300 X 38
The value of final goods produced in this economy = $ 352,400
d) The GDP in this economy by expenditure approach = $ 6300 X 38 cars
The GDP in this economy by expenditure approach = $ 239,400
e) Nominal GDP= 38 X $ 5900
Nominal GDP in next year = $ 224,200
CPI next year = (current year price / base year prices) X 100
CPI next year = ($ 5900 / $ 6300)
CPI next year = 0.9365
Read GDP next year = Nominal GDP / CPI
Read GDP next year = $ 224,200 / 0.9365
Read GDP next year = $ 239,402.02
Growth rate of real GDP between the first year and the next = ($ 239,402.02 - $ 239,400 /$ 239,400 ) X 100
Growth rate of real GDP between the first year and the next = 0.000847 %