Question

Adam owns Chipcorp, a company that makes computer chips. It sold 700 chips to Widgetcorp and exported 1,000 chips abroad. The price of a chip is $100. Chipcorp bought silicon wafers from abroad for its production process worth $70,000. Also Chipcorp employs an engineer, Becca, at a salary of $60,000.

Clarice owns Widgetcorp, a company that makes widgets. Widgetcorp sold 650 widgets to domestic consumers and exported 50 widgets abroad. The price of a widget is $220. Widgetcor employs only Drew, a designer, with a salary $45,000. (All the manufacturing is done by robots.)

Suppose that the country imported 5,000 burgers from Barland at a price of $7 per burger. (The burgers are consumed by the Techland residents.)

a.) Find GDP using the expenditure approach.

b.) Find GDP using the income approach.

c.) Find GDP using the production (value-added) approach.

d.) Suppose that next year everything stays the same with the exception that Chipcorp buys a new chip fabrication machine from abroad at a price of $20,000. Recompute GDP using the expenditure approach. (Hint: the machine will be used for some time, so it is not an intermediate good. What kind of a purchase is it?)

Answer 1

a) GDP (Expenditure Approach) =

Final Expenditure on widgets(Domestic Consumers) = 650 *220 = 143000

+

Net Exports = Exports -Imports = $111000 - $105000 = $6000

= $149000

(Exports = Export of Chips +Widgets = 1000* 100 + 50 *220 = 100000 + 11000 = $111000

Imports = silicon wafers + Burgers = $70000 + 5000*$7 = $105000)

Note..In expenditure method only final expenditure on Consumption & Investment is Included.

b) GDP Income Method = Salary Of Becca +Salary of Designer = $60000+$45000 = $105000

Note..Sum of Factor incomes constitutes GDP..Here only Salary.i.e Compensation of Employees given so that is included.

c) GDP by Value Added Method

Value added by Chipcorp = Sales - Purchases = $170000 - $70000 = $100000

Sales = Sales to Widgetcorp ( 700 * 100 = $ 70000) + Export of Chips(1000*

*$100 = $100000 = $170000

Purchases = Imports of Silicon wafers ($70000)

Value added by Widgetcorp = Sales - Purchases = $154000 - $70000 = $84000

Sales = Sales to domestic Consumers(650*$220) $143000 + Exports (50*$220) $11000

= $143000 + $11000 = $154000

Purchases = Purchases from Chipcorp ( 700 * 100 )= $ 70000

GDP by Value adde method = Value added by Chipcorp + Value added by Widgetcorp = $100000 + $ 84000 = $184000

Note ..Value added by all the firms is added.

d) If chipcorp Purchases a machinery from abroad of $ 20000 , it eill be treated as expenditure on final goods(Investment) and GDP WILL INCREASE BY $20000.

Final Expenditure on widgets(Domestic Consumers) = 650 *220 = 143000

+

Net Exports = Exports -Imports = $111000 - $105000 = $6000

+ Gross Investment(Import of Machinery) $ 20000 = $169000

(Exports = Export of Chips +Widgets = 1000* 100 + 50 *220 = 100000 + 11000 = $111000

Imports = silicon wafers + Burgers = $70000 + 5000*$7 = $105000)

Note..Normally GDP by all methods should give same result but in the above case question is based on selective transactions only so the answer is different on all the three cases..