Question

Consider two countries, the United States (U.S.) and Japan. In the U.S., there are two firms, Pikes Peak Steel (PPS) and General Motors (GM), both owned by U.S. citizens. In Japan, there is one firm, Toyota, owned by Japanese citizens. All of the employees of PPS and GM are U.S. citizens and all of the employees of Toyota are Japanese citizens. In a given year, PPS produces $6000 worth of steel and pays wages of $1500. It sells $2000 worth of steel to GM and $4000 worth of steel to Toyota. GM buys $2000 worth of steel from PPS and pays wages of $4000. GM produces $8000 worth of cars during the year; it sells $5500 worth of cars to consumers in the U.S., $1500 worth of cars to the U.S. government, and $1000 worth of cars to consumers in Japan. Toyota buys $4000 worth of steel from PPS and pays wages of $2500. Toyota produces $9500 worth of cars during the year; it sells $5000 worth of cars to consumers in the U.S., $1000 worth of cars to the Japanese government, and $3500 worth of cars to consumers in Japan. For the U.S. and Japan, calculate the following (please show your work) a. Gross domestic product (GDP) using the income and expenditure approaches

Answer 1

The question asks to determine GDP for the U.S and Japan using income and expenditure approach.

GDP using EXPENDITURE APPROACH

According to the expenditure approach,

where;

C: Consumption by households on final goods and services

I: Investment spending on business capital goods

G: Government spending on public goods and services

NX: Net exports i.e (Exports- Imports)

FOR THE U.S

GDP= $5,500 (household spending by U.S consumers on cars produces by GM) + $2,000( Investment spending by GM on buying steel from PPS) + $1,500 ( U.S. govt. spending on cars produced by GM)+ $5,000 (exports worth 4000 to Toyota by PPS and worth 1000 by GM to Japanese customers) - $5,000 (imports from Japan)

GDP= $9,000

FOR JAPAN

GDP= $3,500(household spending by Japanese customers on cars produces by Toyota) + $4,000( Investment spending by Toyota as it buys steel from PPS) + $1,000 ( Japanese govt. spending on purchase of Toyota cars) + $5,000( export to U.S. customers) - $5,000 ( imports worth 4000 from US steel company PPS and imports worth 1,000 from U.S company GM)

GDP= $8,500

GDP using INCOME APPROACH

where;

Total national income includes wages, rental income, interest income and profits

In the given case, we have only the wages component of the total national income. Also, we don't have any sort of indirect business taxes or depreciation.

FOR THE U.S.

GDP= $1,500 ( wages paid by PPS) + $4,000 ( wages paid by GM)

GDP= $5,500

FOR JAPAN

GDP= $2,500 ( wages paid by Toyota)