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In: Economics

An economy has 80 workers producing two goods: bananas and tractors. Each worker can produce either...

An economy has 80 workers producing two goods: bananas and tractors. Each worker can produce either 5 tons of bananas or 2 tractors in a year. Currently, 60 workers produce bananas, and the rest produce tractors. The price of a ton of bananas is $200, and that of a tractor is $500. Each worker earns $600 in wages a year. The government sector buys 15 tractors a year. There is no depreciation or ROW in this economy. Assume that firms distribute ALL of their profits to the households as dividends.

  1. Calculate the level of consumption (C), investment (I), government expenditures (G), and national product (NP).
  2. The government taxes households’ income at 15%. Calculate the level of government tax revenues (T), and the government’s budget. Is there a surplus or a deficit?
  3. Calculate the savings of households and firms, and show that: Savings = Investment.
  4. Suppose firms decide not to distribute any of their profits as dividends instead. Would this change: the National Product? What would the main difference be?

Solutions

Expert Solution

We are provided following information:

Number of workers: 80 where 60 produces bananas and 20 produces tractor.

Wages of worker: $600 per year.
Price of bananas: $200 per ton.
Price of tractor: $500
Government purchase: 15 tractors per year.
(a) Consider, we shall use income and expenditure method to calculate the level of consumption, investment, government expenditure and national product.

According to Income method, all the incomes that accrue to the factors of production by way of wages, profits, rent, interest, etc. are summed up to obtain the national income.

In our question, only wages are provided. Therefore, total wages = National income.

The total wages are: 80*600 = $48,000.

According to the value added method, the total production in the economy is summation of total production of bananas and tractors.

The total production is : TP = PcC+ PgG = 60*200 + 20*500 = 22,000.

The government expenditure is on bananas i.e. 15*500 = $75,000.

Since, we are not provided whether goods are traded or not. We assume what workers produce also consume after deducting for government expenditure.

Therefore, Y = 22,000 C = 16,000 G = 75,000. Using national income identity, we find investment level in the economy.

Y = C+I+G ---> 22,000 = 16,000+I+75,000 ---> I = 69,000.

The total investment in the economy is $69,000.

(b) The government taxes household income by 15%. The tax revenue would be: T = 22,000*0.15 = $3300.

We already know Government expenditure is $75,000.

Therefore. Government budget would be B = T-G ---> 3300-75,000 = (-)71,700.
The government runs deficit budget.

(c) The total amount of private savings (savings by the households and firms) is going to be equal to the amount:

Spvt = Y-C-T = 22,000-16,000-3300 = 2700

Spub = T-G = (-) 71,000.

Therefore, aggregate savings are Spvt+Spub = 2700+ (-) 71,700 = (-)$69,000. The amount is equivalent to the aggregate investment we found earlier.

d):- Yes, this changes the national product because the main differnce is changing the amount and the procutivity..They cant get profits instead they took the loss.

Rahul Sunny answered 2 years ago
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