Question

Assume an economy with two firms. Firm A produces wheat and firm B produces bread. In a given year, firm A produces 50,000 bushels of wheat, sells 20,000 bushels to firm 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 firm 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 expen- diture approach, and (c) the income approach.

Answer 1

Answer:

Product approach

Firm A produces 50,000 bushels of                 $150,000

wheat at $3/bushel)

Firm B produces 50,000 loaves of bread at     $40,000

$2 per loaf $100,000; pays $60,000 to firm A  

For 20,000 bushels of wheat, i.e. intermediate

input. Thus value added will be $40,000.  

GDP                                                                       190,000

Expenditure approach

Buy 50,000 loaves of domestically                       100,000

produced bread at $2/loaf  

Buy 15,000 loaves of imported bread at $1/loaf   15,000

Consumption spending                                                                 115,000

Investment (Firm A adds 5,000 bushels of                                  15,000

wheat at $3/bushel)  

Exports (Firm A exports 25,000 bushels                75,000

of wheat at $3/b)  

Import (Consumers import 15,000                           15,000

loaves of bread at $1/loaf)

Net exports (Exports - Imports)                                                      60,000

Government spending                                                                         0    

GDP                                                                                                  190,000

Income approach

Wages (Firm A 50,000 + Firm B 20,000)                             70,000

Firm A’s profits (produces $150,000 of

wheat & pays $50,000 in wages)                    100,000  

Firm B’s profits (Produces $100,000 of           20,000

bread and pays $20,000 in wages and pays

$60,000 to Firm A for wheat. Profits 100,000

- 20,000 - 60,000)  

Total profit income (100,000 + 20,000)                                 120,000

GDP                                                                                           190,000