Question

Consider an economy which consists of three firms, A, B, and C, consumers, and a government. Firm A is a smart phone factory, while Firm B is a parts factory. Firm C is a smart phone retailer. In 2020, Firm B produces $250,000 worth of parts, of which $150,000 it sells to Firm A, and $40,000 to Firm C. In addition Firm B sells $30,000 worth of parts to the government, and $30,000 worth of parts it exports. Firm B pays workers $140,000. Firm A produces smart phones worth $400,000, out of which $250,000 it sells to the smart phone retailer (Firm C), $80,000 it sells to the government, and $70,000 worth of smart phones it stores as inventory to be sold the following year. The smart phone factory (Firm A) uses imported materials from China worth $25,000. The smart phone factory pays workers $100,000 and $20,000 in taxes to the government. The smart phone retailer (Firm C) sells $380,000 worth of smart phones: $340,000 worth to domestic consumers, and $40,000 to foreign consumers in the United States. The smart phone retailer pays taxes $40,000 to the government and $50,000 to the workers for marketing and sales. Consumers receive $50,000 as dividends from abroad. The profits of firms A and C are distributed to domestic consumers. However, firm B is foreign owned.
• (a) Calculate GDP using, the product approach, the expenditure approach, the income approach. Show your work clearly (Note: you will not get marks for simply providing the final number). 

• (b) Calculate GNP, the current account surplus, and government savings for this economy. 


Answer 1

(a)

Product approach:

Value added by all the sectors in the economy=Sales-Inputs

Firm A: Sales=400000, Inputs=150000+25000; Value added=225000

Firm B: Sales=250000, Inputs=0; Value added=250000

Firm C:Sales=380000, Inputs=290000; Value added=90000

GDP=225000+250000+90000=565000.

Income Approach:

GDP=Wages+Profits+Indirect taxes=140000+100000+50000+110000+105000+20000+40000=565000.

Expenditure Aproach:

GDP=Consumption Expenditure+Investment+Government Expenditure+Exports-Imports =340000+70000+80000+30000+40000+30000-25000=565000.

(b)

GNP=GDP+Income from abroad-Income to abroad=565000+50000-110000=505000.

Current Account surplus=Exports+Income from abroad-Imports-Income to abroad=40000+30000+50000-25000-110000=-15000.

Government savings =Government Taxes-Government Expenditure=60000-110000=-50000.