Question

Consider a simple example economy where there are three companies. Company A produces ice cream; it is located in California but owned by a German.. Company B is a milk producer in California. Finally, Company C is a sugar producer, also located in California.

In 2019, Company A produced and sold to consumers $500 worth of ice cream, using $50 of sugar and $100 of milk. It also paid $150 in wages and $50 in taxes.

Company B produced $200 worth of milk. It sold $100 to Company C and $100 to the consumers. It paid $100 in wages, $20 in interests on a previous loan, and $30 in taxes.

Company C produced $200 worth of sugar, of which $50 was sold to Company A, $100 was exported to Germany, and the remaining was unsold. Company C paid wages for $100 and $40 in taxes.

The government in this California based economy provides public services for which it employs labor and basic income for the poor. In 2019, the government paid wages for $50 and made transfers for $70.

a. Compute GDP for this simple economy using the product approach.

b. Compute GDP for this simple economy using the expenditure approach.

c. Compute GDP for this simple economy using the income approach.

d. What is GNP for this economy?

Answer 1

A) product approach

Valued added by A: 500-(50+100)= 350

Value added by B = (200)

Value added by C = 200-100= 100

GDP = sum total of value added

= 350+100+200

= 650

.

B) expenditure approach

C= 500

X= 100

I = 50

GDP = C+G+I + (X-M)

= 650

C) income approach

Wages = 150+100+100+50= 400

.

Profit income

πB = (200-100-30-20)= 50

πc = (200-140)= 60

Total π= 110

.

Govt income = taxes received

= 50+30+40

= 120

.

Interest income = 20

GDP = sum total of factor incomes

= 400+110+120+20

= 650

owner of A is a foreigner , so his profit is not considered

.

D) GNP= GDP + NFIA (net factor income from abroad )

As foreigner income = 500-150-150-50

= 350

So, GNP = 650-350

= 300

( Net factor income is negative, bcoz income is earned by non residents from the domestic economy)