Question

The table below shows the various items produced and their values in a hypothetical economy within a particular year. Use the information to answer the following questions:

ITEM

VALUE (million GHc)

Sugar cane

200

Tie-and-dye

400

Flour

950

Palm Fruit

1000

Furniture

500

Palm Kernel

2500

Wheat

150

“Friday Dress”

700

Bread

2100

Kernel oil

2800

Subsidy

250

Depreciation

300

Taxes

480

Net Factor Income from Abroad (NFIA)

-500

Using the Value Added approach, Compute:

i) Gross Domestic Product (GDP) at factor price.

ii) Gross National Product (GNP) at market price.

iii) Net National Product at factor price.

iv) Why is the Net Factor Income from Abroad (NFIA) negative? Suggest ways to address the occurrence.          

Answer 1

Let’s first differentiate goods into Final Goods and Intermediate Goods.

Intermediate Goods are those goods which are used as an input for the production of final goods or are used for re-sale or may be further production within the same year. In the given question let’s assume the below goods are intermediate goods:

· Tie and dye – used for cloth production

· Palm Kernal – used for kernel oil production

· Wheat - used for the production of bread and flour

Final Goods are those goods which are used for direct consumption and investment purpose. In the given question Sugar cane, Flour, Palm Fruit, Furniture, Friday Dress, Bread, Kernal Oil ; all these goods are used for direct consumption and investment purposes.

While calculating national income, value of intermediate goods should not be included in order to avoid double counting. Their value is already included in the valuation of final goods.

By adding value of all the final goods by value added method we get Gross Value added at market price which is the gross domestic product at market price. GVA(MP) = GDP(MP)

GVA at MP = GDP at MP = Sum of the values of final goods = 200 + 950 + 1000 + 500 + 700 + 2100 + 2800

GDP at MP = 8250

1. To fine GDP at factor cost we first find Net Indirect Taxes and then subtract that from GDP at MP:

Net Indirect Taxes = Taxes – Subsidy = 480 – 250 = 230

GDP at FC = GDP at MP – Net Indirect Taxes = 8250 – 230 = 8020

2. To find GNP at market price we add net factor from income abroad to GDP at MP:

GNP at MP = GDP at MP + NFIA = 8250 + (-500) = 7750

3. To find Net national product at factor cost we first find GNP at Factor cost and then subtract depreciation from it :

NNP at FC = GNP at MP – Net Indirect Taxes – Depreciation

NNP at FC = 7750 – 230 – 300 = 7220

4. Net factor income earned from abroad is negative when income earned from abroad is less than the income paid to abroad. Various ways of occurrence could be :

o Income earned by non-resident workers in the domestic territory is greater than the income earned by domestic residents employed in abroad.

o Rent payments made to foreign residents is greater than the rents payments received by the domestic residents

o Profits earned by non-resident companies located in the domestic country is greater than profits earned by resident companies located abroad