Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Question
Chapter 13, Problem 1P
To determine
To determine: The GDP as the value added production, as spending on final goods and services and as factor income.
Concept Introduction:
Expert Solution & Answer
Explanation of Solution
a. GDP as the Value added in production.
The value addition can be calculated by the value of input from the value of output, in the given case the value addition can be calculated by summing up the value addition to the pizza company, bread company and the cheese company.
Formula to calculate value addition:
Value addition to bread company is $50
Value addition to cheese company is $35
Value addition to pizza company is $115
Substitute $50 for value addition to bread company, $35 for value addition to cheese company, and $115 for value addition to pizza company.
Therefore, GDP by value addition will be $200.
Conclusion:
Thus, GDP by value addition will be $200.
b. GDP as spending on final goods and services.
For the calculation of spending on final goods and services, only the output of pizza company is to be calculated because the output produced by other two companies will be the input for pizza company. Therefore, GDP as spending on final goods and services will be $200.
Conclusion:
Thus, GDP as spending on final goods and services will be $200.
c. GDP as factor income.
To calculate GDP as factor income, the factor income of all the three companies are needed to be calculated. In the given cases, factor income of all three companies is the sum of the wages and their profits.
Formula to calculate GDP as factor income:
Factor income of bread company is $50
Factor income of cheese company is $35
Factor income of pizza company is $115
Substitute $50 for factor income of bread company, $35 for factor income of cheese company and $115 for factor income of pizza company:
Conclusion:
Thus, GDP as factor income is $200.
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