Assume an economy with two rms. Firm A produces wheat and rm B produces bread. In a given year, rm A produces

50,000 bushels of wheat, sells 20,000 bushels to rm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and

stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread,

and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the

50,000 loaves of bread consumers buy from rm B, consumers import and consume 15,000 loaves of bread, and they pay

$1 per loaf for this imported bread. Calculate gross domestic product for the year using

(a) the product approach,

(b) the expenditure approach, and

(c) the income approach.

Question

Business

Xiomara Hobbs

12 January, 09:48

Assume an economy with two rms. Firm A produces wheat and rm B produces bread. In a given year, rm A produces

50,000 bushels of wheat, sells 20,000 bushels to rm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and

stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread,

and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the

50,000 loaves of bread consumers buy from rm B, consumers import and consume 15,000 loaves of bread, and they pay

$1 per loaf for this imported bread. Calculate gross domestic product for the year using

(a) the product approach,

(b) the expenditure approach, and

(c) the income approach.

+1

Answers (1)

Know the Answer?

Sean Beck · Answer 1

(a) Product approach;

The value of Firm A's production 50,000 * $3=$150,000.

The value of Firm B's production 50,000 * $2 = $100,000.

Firm B pays $60,000 to firm A for 20,000 bushels of wheat, which is an intermediate input. Firm B's value added is therefore $40,000. GDP is therefore equal to $190,000.

(b) Expenditure approach:

Consumers buy 50,000*$2/loaf and 15,000*$1/loaf.

Consumption spending is therefore equal to $100,000 + $15,000 = $115,000.

Firm A adds 5,000 bushels * $3 = $15,000.

Firm A exports 25,000 * $3 = $75,000.

Consumers import 15,000 * $1=$15,000.

Net exports are equal to $75,000 - $15,000 = $60,000. There is no government spending. GDP is equal to consumption ($115,000) plus 3 investment ($15,000) plus net exports ($60,000). G

DP = $190,000.

(c) Income approach:

Firm A pays $50,000 in wages + Firm B pays $20,000 in wages = $70,000. Firm A produce $150,000 - $50,000 in wages=. $100,000 profits.

Firm B produces $100,000 - $20,000 in wages - $60,000 to Firm A for wheat=$20,000 profits

Total profit income in the economy equals $100,000 + $20, 000 = $120,000. Total wage income ($70,000) plus profit income ($120,000) equals $190,000. GDP is therefore $190,000.