Consider an economy with two firms and a government. Firm 1 produces 10000 units of good X, which it sells for $20 per unit. It uses this revenue to pay $140000 in wages, $10000 in taxes, and $10000 in interest on a loan, with the rest as profits. Firm 1 sells some of its output to consumers, and some to Firm 2 as an intermediate good in their production process. Firm 2 uses good X as an input into its manufacturing process. It buys 8000 units of good X and uses them to create 1000 units of good Y, which it sells for $400 per unit. It pays $200000 in wages and $20000 in taxes, with the rest as profits. The government takes in taxes from only these two firms, and uses it to pay wages to provide government services, for instance national defense. Calculate GDP using the three different methods. Of course, you'll arrive at the same answer; however, indicate clearly what values you're using in each case to arrive at the final answer, so as to illustrate you know what is included in each method of calculating GDP. 1)Income approach: 2)Expenditure approach: 3)Product(value-added) approach: b) A foreign competitor enters the market for goodX. Consumers and firm 2 still consume the same level of good X; however, Firm 1 now only produces 8000 units of good X, with the foreign firm selling 2000 units of good X (1000 to consumers and 1000 to Firm 2). Firm 1 pays the same wages and taxes as it did when it sold 10 000 units of good X. Re-calculate GDP using your favorite method.
Consider an economy with two firms and a government. Firm 1 produces 10000 units of good X, which it sells for $20 per unit. It uses this revenue to pay $140000 in wages, $10000 in taxes, and $10000 in interest on a loan, with the rest as profits. Firm 1 sells some of its output to consumers, and some to Firm 2 as an intermediate good in their production process. Firm 2 uses good X as an input into its manufacturing process. It buys 8000 units of good X and uses them to create 1000 units of good Y, which it sells for $400 per unit. It pays $200000 in wages and $20000 in taxes, with the rest as profits. The government takes in taxes from only these two firms, and uses it to pay wages to provide government services, for instance national defense. Calculate GDP using the three different methods. Of course, you'll arrive at the same answer; however, indicate clearly what values you're using in each case to arrive at the final answer, so as to illustrate you know what is included in each method of calculating GDP. 1)Income approach: 2)Expenditure approach: 3)Product(value-added) approach: b) A foreign competitor enters the market for goodX. Consumers and firm 2 still consume the same level of good X; however, Firm 1 now only produces 8000 units of good X, with the foreign firm selling 2000 units of good X (1000 to consumers and 1000 to Firm 2). Firm 1 pays the same wages and taxes as it did when it sold 10 000 units of good X. Re-calculate GDP using your favorite method.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider an economy with two firms and a government. Firm 1 produces 10000 units of good X, which
it sells for $20 per unit. It uses this revenue to pay $140000 in wages, $10000 in taxes, and $10000 in
interest on a loan, with the rest as profits. Firm 1 sells some of its output to consumers, and some to
Firm 2 as an intermediate good in their production process.
Firm 2 uses good X as an input into its manufacturing process. It buys 8000 units of good X and uses
them to create 1000 units of good Y, which it sells for $400 per unit. It pays $200000 in wages and
$20000 in taxes, with the rest as profits.
The government takes in taxes from only these two firms, and uses it to pay wages to provide
government services, for instance national defense.
Calculate GDP using the three different methods. Of course, you'll arrive at the same answer; however,
indicate clearly what values you're using in each case to arrive at the final answer, so as to illustrate
you know what is included in each method of calculating GDP.
1)Income approach:
2)Expenditure approach:
3)Product(value-added) approach:
b)
A foreign competitor enters the market for goodX. Consumers and firm 2 still consume the same level
of good X; however, Firm 1 now only produces 8000 units of good X, with the foreign firm selling
2000 units of good X (1000 to consumers and 1000 to Firm 2). Firm 1 pays the same wages and taxes
as it did when it sold 10 000 units of good X. Re-calculate GDP using your favorite method.
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