Question

An economy produces two goods: food and ovens. There are 50 workers, each of whom can produce 100 units of food OR 1 oven in a year. Wages are $800 per worker per year. The price of a unit of food is $10, and the price of an oven is $1000. Currently, 30 workers produce food and the rest produce ovens. The government buys 200 units of food a year. There is no depreciation or ROW sector in this economy. a. Calculate the level of consumption, investment and government expenditures, and national product in this economy. b. What are the sales, costs, profits, investments, and dividends? c. Assume that no profits are distributed to the households. The government taxes the income of households only at 10%. Calculate the tax revenue, and write down the budget of the government. Is the government running a deficit or a surplus? d. Show that national income = national product in this economy e. Write down the national Savings =Net Investment relationship and verify it.

Answer 1

There are 50 workers. Two goods are produced food and oven. Each worker can produce 100 units of food or 1 oven per year. 30 workers engage in food production and 20 engagage in oven production. Each worker is paid $800 per year. Price of food is $10 per unit and price of oven is $1000 per unit. Government purchases 200 units of food.

Now total food production is 30 workers and per workers 100 units and total it will be 30*100 =3000 units. Total oven production is 20 units as each produce 1 unit and 20 workers engage in it.

a). Government purchase of food is 200 units. Value of government purchase is 200*$10 =$2000.

Remaining amount of food is 3000 - 200 =2800. Value of this remaining food is 2800*$10 =$28000.

Value of oven production is 20*$1000 =$20,000.

So total value of production is $28,000+$2000+$20000 =$50,000. This $50,000 is gross national product. As there is no export and import.

In this economy government purchase is $2000. National product is $50,000. Consumption+ Investment is $48,000.

Now total wage income will be 50*$800 =$40,000.

So consumption will be $40,000.

Investment is $48,000 -$40,000 =$8000.

b.) Sales of this economy is $30,000 in terms food and $20000 in terms of oven. Total sales $50,000.

Cost is 50 workers and wage per worker is $800. Cost for 50 workers is 50*$800 =$40,000.

Profit = $50,000 - $40,000 =$10,000.

c.) If government taxes 10% on the income then total taxes will be 10% of total income. Total wage income is 50*$800=$40,000. Now 10% of $40,000 is $4000. So, tax revenue is $4000.

Government purchase is $2000. Therefore there is a surplus of $4000 - $2000 =$2000.

d.) National income of this economy is wage income plus profit income. As here we do not have any rent income and interest income. So total wage income is $40,000 and total profit income is $10,000. Therefore total income is $50,000. Total value of national product also $50,000 because $30,000 in terms of food production and $20,000 in terms of oven production.