Firm 1 produces an intermediate good, and Firm 2 uses this intermediate good as an input to its production of its final good called “widgets”. Firm 1 produces tires and sells $5,000 of its tires to Firm 2. Firm 1’s costs include $3,000 to its workers, $500 as payments of interest on its outstanding debt, and $1,000 on rent for the property it uses. The owners keep the remaining revenues as profits. Firms 2 buys the tires and turns them into a final good called widgets. Firm 2 buys $5,000 of tires, creates these widgets, and produces $8,000 worth of widgets. 75% of these widgets are sold to domestic consumers, and 10% of the widgets are sold to the local Government. Firm 2 then keeps the last 15% of the widgets. It keeps these 15% of the widgets to be sold in the widget market next year. Firm 2 spends $5,000 on tires as an input to production, pays $400 to its staff, pays $500 in building rent, pays $300 to rent some machines it needs to use and does not own, and pays the rest of its revenues to the owner of the firm as profits. A) Calculate GDP for this mini-economy using the value-added approach. What is the contribution of each firm to this total GDP? B) Calculate GDP for this mini-economy using the expenditure approach. What is the contribution of each firm to this total GDP and what is the contribution of each of the four inputs to GDP (C, G, I, & NX) under the expenditure approach in this example? C) Calculate GDP for this mini-economy using the income approach. What is the contribution of Net Domestic Income and Non-Factor Payments to this total GDP?
Firm 1 produces an intermediate good, and Firm 2 uses this intermediate good as an input to its production of its
final good called “widgets”.
Firm 1 produces tires and sells $5,000 of its tires to Firm 2. Firm 1’s costs include $3,000 to its
workers, $500 as payments of interest on its outstanding debt, and $1,000 on rent for the
property it uses. The owners keep the remaining revenues as profits.
Firms 2 buys the tires and turns them into a final good called widgets. Firm 2 buys $5,000 of
tires, creates these widgets, and produces $8,000 worth of widgets. 75% of these widgets are
sold to domestic consumers, and 10% of the widgets are sold to the local Government. Firm 2
then keeps the last 15% of the widgets. It keeps these 15% of the widgets to be sold in the
widget market next year.
Firm 2 spends $5,000 on tires as an input to production, pays $400 to its staff, pays $500 in
building rent, pays $300 to rent some machines it needs to use and does not own, and pays the
rest of its revenues to the owner of the firm as profits.
A) Calculate GDP for this mini-economy using the value-added approach. What is the
contribution of each firm to this total GDP?
B) Calculate GDP for this mini-economy using the expenditure approach. What is the
contribution of each firm to this total GDP and what is the contribution of each of the
four inputs to GDP (C, G, I, & NX) under the expenditure approach in this example?
C) Calculate GDP for this mini-economy using the income approach. What is the
contribution of Net Domestic Income and Non-Factor Payments to this total GDP?
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