Question

4. Suppose that an economy shows only the following activities in a specific year:
i. It costs an automobile manufacturing company $7 million to assemble 4,000 cars. The cars are then sold to stores for $10 million.
ii. The stores pay their workers an annual wage of $2.5 million, and then sell the cars directly to the consumers for $18 million.

a) Calculate the GDP in this economy using the production of final goods approach.
b) Calculate the GDP using the value-added approach. Show the value added at each stage of production.
c) Calculate the GDP using the income approach. Show the costs incurred and profit earned.

Answer 1

a) GDP(using production of final goods) = $18 million. (i.e. the value of the final good sold to the consumers)

b) GDP(using value-added approach) :
Value added in 1st stage(Manufacturer to Store) = $10 million
Value added in 2nd stage(Store to consumer) = $(18-10)million = $8 million

Therefore, GDP = $18 million (for final good sold to customer)

c) GDP(using income approach) :
Costs incurred = $7 million + $2.5 million = $9.5 million
Profit earned = $(10-7) million + $(18-10-2.5) million = $3 million + $5.5 million = $8.5 million
GDP = Costs incurred + Profit earned = ($9.5 + $8.5) million = $18 million

[Note - GDP will be of same value, regardless of approach]