Question

Initially, he is stuck on an island without the wisdom and local knowledge of Friday. Because Crusoe is a proper Englishman, he wants to keep his accounts. This year, he catches and eats 2,000 fish valued at one British pound (£) each, grows and eats 4,000 coconuts valued at 0.5 British pounds each, and makes two huts (housing) valued at 200 pounds each.

Now, using the following:
a. If government purchases are zero and there is no trade, what is C for Crusoe? What is I? What is Y? (We are going to start using those letters as if they mean something).

b. Next year, RC learns of a tribe on a nearby island who are willing to trade with him: If he gives fish, they give clams. He produces just as much fish as before, but he trades 500 of the 2,000 fish and receives 10,000 clams valued at 5 clams per British pound.

What is the NEW British pound values of: the exported fish? the imported clams? What are C, and I? What is GDP (Y) now?

c.The following year, Crusoe produces the same as in every other year, but a tribe on the other side of the island steals his newly produced two huts, and gives him nothing in return. What are C, I, X, and Y now?

Answer 1

Answer:

a) C = £4000

I = £400

Y = £4400

b) New value of exported fishes = £2000

New value of imported clams = £500

C = £5500

I = £400

Y = £4400

c) C = £4000

I = £400

X = -£400

Y = £4000

Explanation:

Using the national spending approach.

Y = C + I + G + NX

Y = GDP

C = Consumer purchases

I = Investment purchases

G = Government purchases

NX = Total Exports - Total Imports

a) C = (2000 × 1) + (4000 × 0.5) = 2000 + 2000 = £4000 (the fishes and coconuts are consumer purchases)

I = (200 × 2) = £400 (the two huts he built are investment purchases)

G = 0 (no government purchase)

NX = X = 0 (no import or export)

Y = 4000 + 400 = £4400

b) He sells 500 fishes and gets 10000 clams. Clams are valued at 5 clams per pound.

New value of the exported fish = worth of the clams obtained in return for the fishes sold

5 clams = £1

10000 clams = (10000×1/5) = £2000

New value of the imported clams = worth of fishes exchanged for the clams

1 fish = £1

500 fishes = £500

C = (1500 × 1) + (4000 × 0.5) + (10000×0.2) = 1500 + 2000 + 2000 = £5500 (Number of local fish purchase reduces by 500, and the 10000 clams add to consumer purchases for the economy)

I = (200 × 2) = £400

G = 0

NX = £500 - £2000

Y = C + I + G + (X)

Y = 5500 + 400 + 0 + (-1500) = £4400

c) A tribe steals his newly produced huts and give him nothing in return

C = (2000 × 1) + (4000 × 0.5) = £4000

I = (200 × 2) = £400

G = 0

X = -(200 × 2) = -£400 (he gets nothing in return from the export of the houses)

Y = 4000 + 400 + 0 - 400 = £4000

Hope this Helps!!!