Question

rm Firm B Firm C Values of Sales Intermediate goods Wages Interests payment:s Rent Profit $4,200 (ore) S9,000 (steel $21,500 (car) $9,000 S0 $4,200 $2,000 $3,700 $10,000 $1,000 $600 $1,000 $300 $200 $9,000 $200 $500 $1,000 $21,500 $1,000 Total expenditure S4,200 HW3 (due next Wednesday, February 13,2019 at the beginning of class) Q1, Lets us consider an economy that consists of three firms (firm A, Firm B and Firm C) there is no foreign sector. Firm A mines the iron ore that goes into steel. Fim B buys the ores from firm A and use it to produce the steel that goes into the production of çars. Firm C uses the steel to produce one car per year (car is the final good) A) Compute value added for firm A, Firm B and Firm C B) Compute the total yalue of sales for all the firms i.e. total sales is (sales for firm A + sales for Firm B + sales for firm C) C) The yalue found in part B is that the yalue for GDP, yes/no, why? D) Compute GDP using the Product Approach E) Compute GDP using the expenditure Approach F) Compute GDP using the Income Approach G) What can we conclude about all three methods in computing the yalue of GDP

Answer 1

a) Value added = value of sales - value of intermediate goods

firm A = $4200 - $0 = $4200

firm B = $ 9000 - $4200 = $ 4800

firm C = $21,500 - $9000 = $12,500

b ) total sales by all firms = sales A +. sales B + sales C

= $4200 + $9000 + $21,500

$34,700

c ) Value found in part b is not the gdp as there double counting of value of ores and steel , as these values are included in the value of car also .

d ) GDP using product approach = value added by firm A + value added by firm b + value added by firm C

= $4200 + $4800 + $12,500

= $21,500

e) GDP using expenditure method takes into account only the expenditure on final value of goods and services .

Since goods by firm A and B are intermediate goods , there expenditure will not be included in GDP calculation.

so GDP according to expenditure approach = expenditure on cars by consumers = $21,500

f ) GDP using income approach = (total wages + total rent +total  profit + total interest ) by all 3 firms

= 15,700 + 1000 + 2200 + 2600

= $21,500

g) value of GDP by all three methods is same .