Question

15. Consider an orange island economy that consists of only two companies: an orange company that produces oranges and an orange juice company that purchases oranges from the orange company to produce orange juice. Their income statements in 2015 are as follows:

Orange Company:

   Wages paid to employees                           $15,000

   Taxes paid to government                          $ 5,000

Sales revenue:

             Oranges sold to public                        $10,000

             Oranges sold to Juice Corp.                $25,000

Orange Juice Company:

   Wages paid to employees                           $10,000

   Taxes paid to government                          $ 2,000

   Juice boxes imported from China               $ 1,000

   Oranges purchased from orange corp.        $25,000

   Sales revenue                                              $40,000

1. Please calculate the 2015 GDP of this economy using Product approach, income approach and expenditure approach.
2. Suppose that, in addition to above transactions, the juice company imported juice boxes from China for $1000. Again, calculate the 2015 GDP of this economy using Product approach, income approach and expenditure approach.

Answer 1

A) Product approach or value added method

Orange company value addition=10,000+25,000-0=35,000

Juice company value addition=40,000-25,000-1000=14,000

GDP=35,000+14,000=49,000

Expenditure approach

There are two final expenditure, first when orange company sold orange to public and second juice company sold jiuce to Public

So,GDP= total consumption expenditure=10,000+40,000=50,000

Income approach,

NDP=sum of all income earned by individuals and firms=15,000+15,000( Profit of orange company)+10,000+3000( Profit of juice company)=43,000

GDP= NDP+ taxes=43,000+5000+2000=50,000

B) by including import of juice boxes

Product approach or value added method

Orange company value addition=10,000+25,000-0=35,000

Juice company value addition=40,000-25,000=15,000

GDP=35,000+15,000=50,000

Expenditure approach

There are two final expenditure, first when orange company sold orange to public and second juice company sold jiuce to Public

So,GDP= total consumption expenditure- imports =10,000+40,000-1000=50,000-1000=49,000

Income approach,

NDP=sum of all income earned by individuals and firms=15,000+15,000( Profit of orange company)+10,000+2000( Profit of juice company)=42,000

GDP= NDP+ taxes=42,000+5000+2000=49,000