Consider an economy populated by Farmer Freddy, Baker Betty, and a bunch of consumers.
Farmer Freddy and Baker Betty each own their respective businesses, so they keep all of their own profits.
Farmer Freddy hires labor and grows 100,000 bushels of wheat. He sells 60,000 of those bushels to Betty for $5 per bushel and exports 40,000 bushels abroad at $5 per bushel.
Freddy pays $400, 000 in wages to the consumers.
Baker Betty hires labor and uses the wheat she purchased to produce 300,000 loaves of bread, which she sells to the consumers at $2 each.
Betty pays $250, 000 in wages to the consumers.
In addition to buying Betty's bread, the consumers import $50, 000 worth of peanut butter and jelly from abroad, which they use to make sandwiches, of course.
a. Calculate gross domestic product for this economy using the production (value added) approach.
b. Calculate gross domestic product for this economy using the expenditure approach.
c. Calculate gross domestic product for this economy using the income approach
Methods to Compute GDP
There are three methods to calculate GDP. All three methods yield the same result.
1. Value-Added Approach: In order to calculate GDP, only the final value of goods and services produced is added.
2. Income Approach: This approach makes use of the profits, wages, interest and dividends of the economy.
3. Expenditure Approach: This method makes use of the equation:
GDP= Consumption expenditure +investment expenditure + government expenditure +net exports
Answer and Explanation:
1. Value-added approach:
Final value of goods sold in the domestic market= 600,000
Final value of goods sold abroad=200000
Adjusting for golds brought from abroad=-50000
Adding the above= 750, 000
2. Expenditure Approach:
3. Income Approach
Profit of Freddy= 500000-400000 = 100000
Profit of Baker= 600000-300000-250000= 50000
wages by Freddy=4000000
wages by Baker=2500000
Adding the above= 750 000
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from Economics 102: MacroeconomicsChapter 5 / Lesson 6