Question

How does GDP accounting record the following events? For each of them, describe how they would be computed in GDP accounts using the income method, the production method and the expenditure method

(a) Panasonic builds a TV which it sells domestically for $500. Panasonic’s only costs were labor costs of $200.

(b) You purchase a brand new house for $250,000 and live in it for three month,the rental rate to live in a similar house is $1,000 a month. For simplicity assume the house was produced at zero cost by a corporation.

(c) Walmart sells 1000 bottles of Coca-Cola for $1,500. It had purchased them last year and paid $1,200 for them.

(d) Mining Inc. mines $10,000 worth of natural resources which it sells to Pear Inc. Pear Inc. uses the natural materials to produce $20,000 worth of laptops.Pear Inc. sells half the laptops to Wells Fargo to be used in their offices and the other half to individuals for personal use. Mining Inc. pays its employees$5,000. Pear Inc. pays its employees $5,000.

Answer 1

a)The GDP accounting by the

Production method :

Formula for GDP under this method is :

Value added=Value of output-Intermediate Consumption

By this question,we are given value of output=$500 and Intermediate Consumption =$200.Hence,

$500-$200=$300

This value added id GDP for this under Production method.

Income Method:

Formula:

Compensation of employees+Rent and royalty+Interest+Profit+Mixed Income=GDP

Here We are given with profit which is equal to the :

Profit=Income-payment to the factors of production =$500-$200=$300

Hnece $300 is our GDP.

Expenditure Method:

Formula:

Private final Consumption Expenditure+Government final consumption expenditure+Gross domestic Capital Formation +Net exports=GDP

Here we are given the Private final consumption expenditure which is equal to the $300.

b)Production Method:

Value of Output is equal to the Cost of house inclusive on rental services=$253000.

Income method:

Income from all the sources is included in calculation of GDP under this method

Here Rental Receipts are $3000 for 3 months,Though it is imputed rent but it would be included in GDP.

Hence=$250000+$1000*3=$253000

Expenditure Method:

Formula:

Private final Consumption Expenditure+Government final consumption expenditure+Gross domestic Capital Formation +Net exports=GDP

Hence here Gross domestic Capital Formation is given to us =$250000

Hence final GDP =$253000 will be inclusive of imputed rent.

c)Production Method:

Value of output=$1500; Intermediate Consumption=$1200.

Hence GDP $1500-$1200 =$300.

Income method:

Here profit :Income-Payment to the factors of production=$1500-$1200=$300

Expenditure Method:

Expenditure here is private final consumption Expenditure is equal to the $300.