Consider a simple economy consisting of only four firms. Firm A, a mining enterprise, extracts iron ore. Firm B, a Steelmaker, produces steel sheets. Firm C, a carmaker, makes automobile while Firm D produces automobile tires.
In 2016, firm A extracts 50,000 tons of ores, valued at $200 per ton, using previously existing machinery. Firm B produces 10,000 tons of steel sheets, valued at $3000 per ton, having bought and used all of the ore produced by Firm A. Firm C manufactured 5000 vehicles and sold them all to households for 20,000 each, having purchased 8000 tons of steel sheets from Firm B. In addition, Firm C imported 5000 engines from a foreign subsidiary, each valued at $5000, and purchased 20,000 tires from Firm D for $100 each. Firm D produced 100,000 tires valued at $100 each, but only sold 60,000 tires during 2016. Firm D purchased 2000 tons of steel sheets from Firm B since all of their tires are steel belted radials.
Calculate GDP in 2016 for this economy using the production approach (valu added). Also, calculate GDP in 2016 using the expenditure approach.
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To calculate GDP in 2016 using the production approach (value added), we need to calculate the value added at each stage of production in the economy.
1. Firm A: The value added by Firm A is equal to the value of iron ore extracted. Firm A extracted 50,000 tons of ore valued at $200 per ton. Therefore, the value added by Firm A is 50,000 tons * $200/ton = $10,000,000.
2. Firm B: The value added by Firm B is equal to the value of steel sheets produced minus the value of steel sheets purchased from Firm A. Firm B produced 10,000 tons of steel sheets valued at $3,000 per ton, which amounts to $30,000,000. Since Firm B purchased all of its ore from Firm A, there is no value added from purchasing ore. Therefore, the value added by Firm B is $30,000,000 - $10,000,000 = $20,000,000.
3. Firm C: The value added by Firm C is equal to the value of automobiles produced minus the value of inputs purchased. Firm C produced 5000 vehicles valued at $20,000 each, which amounts to $100,000,000. Firm C purchased 8000 tons of steel sheets from Firm B at $3,000 per ton (as stated before), which amounts to $24,000,000. Firm C also purchased 20,000 tires from Firm D at $100 each, which amounts to $2,000,000. Firm C imported 5000 engines from a foreign subsidiary, each valued at $5000, which amounts to $25,000,000. Therefore, the value added by Firm C is $100,000,000 - $24,000,000 - $2,000,000 - $25,000,000 = $49,000,000.
4. Firm D: The value added by Firm D is equal to the value of tires produced minus the value of inputs purchased. Firm D produced 60,000 tires valued at $100 each, which amounts to $6,000,000. Firm D purchased 2000 tons of steel sheets from Firm B at $3,000 per ton (as stated before), which amounts to $6,000,000. Therefore, the value added by Firm D is $6,000,000 - $6,000,000 = $0.
Now, to calculate the GDP in 2016 using the production approach, we sum up the value added by each firm:
GDP = Value added by Firm A + Value added by Firm B + Value added by Firm C + Value added by Firm D
= $10,000,000 + $20,000,000 + $49,000,000 + $0
= $79,000,000
Therefore, the GDP in 2016 using the production approach is $79,000,000.
To calculate GDP in 2016 using the expenditure approach, we need to sum up the expenditure on final goods and services.
GDP = Expenditure on consumption + Gross investment + Government spending + Exports - Imports
1. Expenditure on consumption: In this case, the expenditure on consumption is the amount households spent on purchasing the 5000 vehicles from Firm C, which was $20,000 per vehicle. Therefore, the expenditure on consumption is 5000 vehicles * $20,000/vehicle = $100,000,000.
2. Gross investment: There is no information provided about gross investment in this scenario, so we assume it is zero.
3. Government spending: There is no information provided about government spending in this scenario, so we assume it is zero.
4. Exports: There is no information provided about exports in this scenario, so we assume it is zero.
5. Imports: In this case, the imports include the 5000 engines imported by Firm C from the foreign subsidiary, each valued at $5000, which amounts to $5000 * 5000 = $25,000,000. Also, the imports include the 2000 tons of steel sheets purchased by Firm D from Firm B, which amounts to $3,000 * 2000 = $6,000,000. Therefore, the imports are $25,000,000 + $6,000,000 = $31,000,000.
Now, we can calculate GDP using the expenditure approach:
GDP = Expenditure on consumption + Gross investment + Government spending + Exports - Imports
= $100,000,000 + 0 + 0 + 0 - $31,000,000
= $69,000,000
Therefore, the GDP in 2016 using the expenditure approach is $69,000,000.