Essentials of Economics
Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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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:

Gross Domestic Product (GDP): It refers to the gross money value or gross market value of all the finished goods and services produced by resident and non-resident people of the country that is within the borders of that particular country in an accounting year.

Expert Solution & Answer
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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:

Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  1

Value addition to bread company is $50Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  2

Value addition to cheese company is $35Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  3

Value addition to pizza company is $115Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  4

Substitute $50 for value addition to bread company, $35 for value addition to cheese company, and $115 for value addition to pizza company.

Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  5

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:

Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  6

Factor income of bread company is $50Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  7

Factor income of cheese company is $35Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  8

Factor income of pizza company is $115Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  9

Substitute $50 for factor income of bread company, $35 for factor income of cheese company and $115 for factor income of pizza company:

Essentials of Economics, Chapter 13, Problem 1P , additional homework tip  10

Conclusion:

Thus, GDP as factor income is $200.

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