Question

Write at least two pages

1. James is a well-known wine farmer from Italy who interacts with other members of the wine farmers association to agree on where to supply their farm wine. Each farming season, he gathers his fellow farmers to discuss on the best wine pricing model. As a student of Principles of Economics, assess the above scenario to discuss the above somewhat behavioral economics.

2. Brian is a wheat farmer who sells a bushel of wheat to millers for $10.00. The miller turns the wheat into flour and then sells the flour to a baker for $30.00. The baker uses the flour to make bread and sells the bread to a student for $60.00. The student eats the bread. What is the value added by each person? Calculate GDP.

Discuss the three methods of measuring National Income?

Answer 1

1.

It shall be noted that James, a wine farmer gathers his fellow farmers and discusses the best wine pricing model and seek an agreement on the area where the different wine farmers would supply their farm wine.

This kind of behaviour shown is described in economics as cartel behaviour.

This is done to fix prices and share the market. All wine farmers are potential competition with each other.

When these farmers agree to fix prices, share market, limit supply and share consumers, collectively they are exhibiting cartel-like behaviour.

2.

Value of the output sold by the wheat farmer to miller = $10

Value of intermediate goods used by a wheat farmer in growing wheat = $0

Hence, value-added by wheat farmer = $10 - $0 = $10

Value of the output sold by miller to baker = $30

Value of intermediate goods used by miller = $10

Hence, value-added by miller = $30 - $10 = $20

Value of output sold by the baker to student = $60

Value of intermediate goods used by baker = $30

Hence, value-added by baker = $60 - $30 = $30

Hence, the GDP by value-added method = value-added by wheat farmer + value-added by miller + value-added by baker

= $10 + $20 + $30

=$60

The three methods of estimating national income are:

1) Output method - In this method, national income is measured as a flow of goods and services. We calculate the monetary value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in the further production process. One of the corollaries of the output method is the value-added method. Under this method, the value-added at each stage of production is calculated and these are summed up to arrive at GDP.

2) Income method - Under this method, national income is measured as a flow of factor incomes. There are generally four factors of production labour, capital, land and entrepreneurship. Labour gets wages and salaries, capital gets interested, the land gets rent and entrepreneurship gets profit as their remuneration. Besides, there are some self-employed persons who employ their own labour and capital such as doctors, advocates, CAs, etc. Their income is called mixed-income. The sum-total of all these factor incomes is called NDP at factor costs

3) Expenditure method - In this method, national income is measured as a flow of expenditure. GDP is sum-total of private consumption expenditure. Government consumption expenditure, gross capital formation (Government and private) and net exports (Export-Import)