Question

Assume an economy with a car manufacturer, a car seller, and some consumers (there is no government). The consumers are workers who earn a wage to finance their consumption. In a given year, the car manufacturer produces 200, 000 cars and sells them for $10, 000 per car. The workers’ wages take up 70 percent of the car manufacturer’s revenue. All the materials used for producing cars are imported from other countries at a cost of $1, 000 per car. Half of the manufactured cars are exported oversea and the remaining cars are sold to the domestic car seller. The car seller sells the domestic cars and imported cars at the same price of $15, 000 per car. The car seller sells all of the domestic cars and 5, 000 units of the imported cars to domestic consumers. After paying $5, 000 for the cost of an imported car, the remaining sales revenue is equally distributed between wages and profits.

(a) Calculate GDP using

i. the product approach,

ii. the expenditure approach, and

iii. the income approach.

(b) Suppose that the car manufacturer is a foreign entity and all its profits belong to foreigners. What would GNP and GDP in this economy be in this case?

Answer 1

A) i) product approach or value added approach,

Value added by car manufacturer on per car=final good value - value of raw material=10,000-1000=9000

Total value added by manufacturer=9000*200,000=1,800,000,000

Value added by car seller(domestic car)=15,000-10,000=5000

Value added by car seller ( imported car)=15,000-5000=10,000

Total value added by car seller=5000*100,000+10,000*5000=550,000,000

Gdp=sum of value added by manufacturer and car seller=1.8 +0.55=2.35 billion

ii) expenditure approach ,

Car seller sold to final CONSUMER,

Private consumption expenditure(C)=15,000*100,000+15,000*5000=1.575 billion

I=0

Exports=10,000*100,000=1 billion

Imports=1000*200,000+5000*5000=225 million or 0.225 billion

GDP=C+I+Exports-imports=1.575+0+1-0.225=2.35 Billion

iii)income approach,

Total revenue of car manufacturer=10,000*200,000=2 billion

70% of total revenue as wages =2*0.7=1.4 billion

Profit=TR-wages- raw material=2-1.4-0.2=0.4 billion

Car seller ,

Total revenue=15,000*100,000+5000*15,000=1.575

Total cost=10,000*100,000+5000*5000=1.025

After deducting cost remaining revenue=1.575-1.025=0.55 billion

Divide into half for wages and half for profit

Wages=0.275

Profit=0.275 billion

GDP=wages + profits=1.4+0.4+0.275+0.275=2.35

B)GDP will remain same and equals to 2.35

GNP=GDP+ net income from abroad

Net income from abroad=income from abroad- Income to abroad=0-0.4=-0.4

GNP=2.35-0.4=1.95billion