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.

Calculate the level of consumption (C), investment (I), government expenditures (G), and national product (NP).
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?
Calculate the savings of households and firms, and show that: Savings = Investment.
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 1 year ago

Next > < Previous

Related Solutions

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

An economy has 100 workers producing two goods: coffee and grinders. Each worker can produce either...

An economy has 100 workers producing two goods: coffee and grinders. Each worker can produce either two tons of coffee, or one grinder a year. Currently, 60 workers produce coffee, and the rest produce grinders. The price of a ton of coffee is $150, and that of a grinder is $300. Each worker earns $250 in wages a year. The government sector buys 40 tons of coffee a year. There is no depreciation or ROW in this economy. Assume that...

There are two countries Home and Foreign. They can produce two goods, apples and bananas. Home...

There are two countries Home and Foreign. They can produce two goods, apples and bananas. Home has 1,200 units of labor available and Foreign has a labor force of 800. The table below contains the unit labor requirement in Foreign and Home for each of two goods. Banana Apples Home aB = 1 hour per pound aA = 2 hours per pound Foreign aB = 4 hours per pound aA = 5 hours per pound 1. Suppose that, after opening...

American and Japanese workers can each produce 4 cars a year. An American worker can produce...

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. Construct a world production possibilities frontier, assuming our world consists of only the U.S. and Japan. 5.1 What is the maximum amount of grain our world could consume if the world wished to consume...

1)In one month, Andrea can produce 80 apples or 80 bananas, while Tom can produce 60...

1)In one month, Andrea can produce 80 apples or 80 bananas, while Tom can produce 60 apples or 100 bananas. Currently, Andrea is producing 40 apples and 40 bananas per month while Tom is making 30 apples and 50 bananas. If from now on, Andrea starts making nothing but apples and Tom makes nothing but bananas, and the two trade 35 apples for 45 bananas every month, what will be each person’s gain from trade? a. 10 bananas and 10...

4. A small country is producing potatoes and carrots. Every worker can produce either 3 kilos...

4. A small country is producing potatoes and carrots. Every worker can produce either 3 kilos of potatoes or 9 kilos of carrots per week. Use the Ricardian model to answer the following questions. Assume throughout that consumers want to consume at least a small amount (i.e. not zero) of each good. a) Draw the Production Possibility Frontier (PPF) for the country. Moreover, in autarky when the country is not trading with any other country, what will the relative price...

An economy produces two goods: food and ovens. There are 50 workers, each of whom can...

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....

Imagine a hypothetical economy with two workers - Worker A and Worker B. Assume that Worker...

Imagine a hypothetical economy with two workers - Worker A and Worker B. Assume that Worker A can produce either 10 bottles of wine or 5 yards of cloth in one day. Worker B can also produce wine and cloth. In order to have an absolute advantage in wine, Worker B will have to produce at least-------11--------- bottles of wine. In order to have an absolute advantage in cloth, Worker B will have to produce at least ------6----- yards of...

Both the United States and India produce two goods: tractors and rice. The IJnited States can...

Both the United States and India produce two goods: tractors and rice. The IJnited States can produce either 8 tractors or 16 pounds of rice. India can produce either 4 tractors or 20 pounds of rice. Rice Country (pounds) Tractors Now suppose that both countries open up to trade, and the United States and India completely specialize in the production of the good for which each has a comparative advantage. Select... should produce rice. should produce tractors, and Select... United...

A firm can use either high skilled or low skilled workers in production. One high skilled worker can produce as much as 2 low skilled workers.

A firm can use either high skilled or low skilled workers in production. One high skilled worker can produce as much as 2 low skilled workers.a.Draw isoquants for a production process, the inputs of which are high cost and low cost workers. (Hint: Marginal rate of technical substitution is constant)Unions represent high skilled workers. They are only concerned about the level of employment and wages for high skilled workers. The wage for high skilled workers is $10. Low skilled workers...

Subjects