Question

Consider an economy consisting of exactly two firms A and B. Firm A sells Good X to Firm B and to the public. Firm B produces and sells Good Y for which Good X is an input. Each firm’s costs and revenues for one year are given below.

Firm A

Wages = 25,500     

Taxes = 7,500     

Sales of X to Public = 15,500     

Sales of X to Firm B = 29,000  

Firm B   

Wages = 35,000     

Taxes = 7,000     

Sales of Good Y to Public = 69,000     

Purchase of Good X From Firm A = 29,000

a) Use the value‐added approach to calculate GDP for this economy

b) Use the income approach to calculate GDP for this economy

c) Use the expenditure approach to calculate GDP for this economy.

d) Now suppose that the production of Good X imposes pollution that is valued at $30,000. Given GDP accounting methods, would this reduce calculated GDP?

Answer 1

Answer a : Calculation of GDP with Value added Method :

Firm A (Final Goods and services selling in the market) = 15,500

Firm B ( Final goods and services in the market ) = 69000

GDP with value added method of whole economy = 84,500

Answer b : Income approach

Firm A (Profit) = Revenue -Expenses = 44,500- 25,500-7500 =11500

Firm B (Profit) = Revenue -Expenses = 69000- 29000- 35000-7000 =(2000)

Wages = 60,500

Taxes = 14,500

Total GDP of an country = 11500-2000+60500+14500 = 84,500

Answer c : Expenditure method :

Total GDP of an economy =Consumpation of good X + Consumpation of good Y = 15,500+69000 = 84,500

Answer d : When pollution has been emited by the good X than the cost has been beared by the company that decrease there profit which resulted in declined in GDP as per income method because there profit has been reduced in an economy.So the final GDP after emission of pollution is 54,500.