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.
Need to show all work, thank you!
Well, this is going to be an interesting calculation. Let's start with the production approach to calculate GDP.
To calculate GDP using the production approach, we need to sum up the value added at each stage of production. The value added at each stage is the difference between the selling price of the final product and the cost of intermediate goods used.
So, let's calculate the value added at each stage:
1. Firm A (Mining Enterprise):
Value Added = Selling Price of Ore - Cost of Intermediate Goods
= (50,000 tons * $200 per ton) - 0
= $10,000,000
2. Firm B (Steelmaker):
Value Added = Selling Price of Steel Sheets - Cost of Intermediate Goods
= (10,000 tons * $3000 per ton) - (50,000 tons * $200 per ton)
= $30,000,000 - $10,000,000
= $20,000,000
3. Firm C (Carmaker):
Value Added = Selling Price of Vehicles - Cost of Intermediate Goods
= (5000 vehicles * $20,000 each) - (10,000 tons * $3000 per ton) - (5000 engines * $5000 each) - (20,000 tires * $100 each)
= $100,000,000 - $30,000,000 - $25,000,000 - $2,000,000
= $43,000,000
4. Firm D (Tire Producer):
Value Added = Selling Price of Tires - Cost of Intermediate Goods
= (60,000 tires * $100 each) - (2000 tons * $3000 per ton)
= $6,000,000 - $6,000,000
= $0
Now, we can finally calculate GDP using the production approach:
GDP = Sum of Value Added at each stage of Production
= $10,000,000 + $20,000,000 + $43,000,000 + $0
= $73,000,000
So, the GDP in 2016 for this economy using the production approach is $73,000,000.
Now, let's calculate GDP using the expenditure approach.
To calculate GDP using the expenditure approach, we sum up the total spending on final goods and services.
The total spending in this case would be:
Households spending on vehicles = (5000 vehicles * $20,000 each)
= $100,000,000
Firm C's spending on imports (engines) = (5000 engines * $5000 each)
= $25,000,000
Firm C's spending on intermediate goods (steel sheets) = (8000 tons * $3000 per ton)
= $24,000,000
Firm D's spending on intermediate goods (steel sheets) = (2000 tons * $3000 per ton)
= $6,000,000
Firm D's spending on intermediate goods (tires) = (20,000 tires * $100 each)
= $2,000,000
Now, we can calculate GDP using the expenditure approach:
GDP = Sum of Total Spending on Final Goods and Services
= $100,000,000 + $25,000,000 + $24,000,000 + $6,000,000 + $2,000,000
= $157,000,000
So, the GDP in 2016 for this economy using the expenditure approach is $157,000,000.
I hope that didn't tire you out!
To calculate GDP using the production approach, we need to determine the value-added at each stage of production, which is the difference between the value of the final output and the value of the intermediate inputs used.
1. Firm A (Mining Enterprise):
The value-added of Firm A is the value of the iron ore extracted.
Value-added = Quantity extracted * Price per ton = 50,000 tons * $200/ton = $10,000,000.
2. Firm B (Steelmaker):
The value-added of Firm B is the difference between the value of steel sheets produced and the value of iron ore used.
Value-added = (Quantity produced * Price per ton) - (Quantity used * Price per ton)
Value-added = (10,000 tons * $3,000/ton) - (10,000 tons * $200/ton) = $30,000,000 - $2,000,000 = $28,000,000.
3. Firm C (Carmaker):
The value-added of Firm C is the difference between the value of cars produced and the value of steel sheets and tires used.
Value-added = (Quantity produced * Price per car) - (Quantity of steel sheets used * Price per ton) - (Quantity of tires used * Price per tire)
Value-added = (5,000 cars * $20,000/car) - (8,000 tons * $3,000/ton) - (20,000 tires * $100/tire)
Value-added = $100,000,000 - $24,000,000 - $2,000,000 = $74,000,000.
4. Firm D (Tire producer):
The value-added of Firm D is the difference between the value of tires produced and the value of steel sheets used.
Value-added = (Quantity produced * Price per tire) - (Quantity of steel sheets used * Price per ton)
Value-added = (60,000 tires * $100/tire) - (2,000 tons * $3,000/ton)
Value-added = $6,000,000 - $6,000,000 = $0.
Total GDP using the production approach:
GDP = Sum of value-added at each stage of production
GDP = $10,000,000 + $28,000,000 + $74,000,000 + $0
GDP = $112,000,000.
To calculate GDP using the expenditure approach, we sum up the final expenditures on all final goods and services.
1. Consumption expenditure:
Households bought 5,000 vehicles at $20,000 each.
Consumption expenditure = Quantity * Price = 5,000 * $20,000 = $100,000,000.
2. Investment expenditure:
There is no investment expenditure mentioned in the information provided.
3. Government expenditure:
There is no government expenditure mentioned in the information provided.
4. Net Exports:
Firm C imported 5,000 engines valued at $5,000 each.
Net Exports = Quantity exported * Price per unit = 5,000 * $5,000 = $25,000,000.
Total GDP using the expenditure approach:
GDP = Consumption expenditure + Investment expenditure + Government expenditure + Net Exports
GDP = $100,000,000 + $0 + $0 + $25,000,000
GDP = $125,000,000.
Therefore, GDP in 2016 for this economy using the production approach is $112,000,000 and using the expenditure approach is $125,000,000.
To calculate GDP using the production approach, we need to determine the value added by each firm in the production process.
1. Firm A:
Firm A's value added is the value of its production minus the value of its intermediate inputs (steel sheets). Value added by Firm A = (50,000 tons of ores * $200 per ton) - 0 = $10,000,000.
2. Firm B:
Firm B's value added is the value of its production minus the value of its intermediate inputs (ores) purchased from Firm A. Value added by Firm B = (10,000 tons of steel sheets * $3,000 per ton) - (10,000 tons of ores * $200 per ton) = $30,000,000 - $2,000,000 = $28,000,000.
3. Firm C:
Firm C's value added is the value of its production minus the value of its intermediate inputs (steel sheets, engines, tires). Value added by Firm C = (5,000 vehicles * $20,000 each) - (8,000 tons of steel sheets * $3,000 per ton) - (5,000 engines * $5,000 each) - (20,000 tires * $100 each) = $100,000,000 - $24,000,000 - $25,000,000 - $2,000,000 = $49,000,000.
4. Firm D:
Firm D's value added is the value of its production minus the value of its intermediate inputs (steel sheets). Value added by Firm D = (60,000 tires * $100 each) - (60,000 tires * $3,000 per ton / 10,000 tons) = $6,000,000 - $18,000 = $5,982,000.
Now, we can calculate the GDP using the production approach by summing 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
GDP = $10,000,000 + $28,000,000 + $49,000,000 + $5,982,000
GDP = $92,982,000
To calculate GDP using the expenditure approach, we need to consider the total spending by households (consumption), plus the spending by Firm C on imported engines, plus the spending by Firm D on intermediate inputs (steel sheets), plus the spending by Firm C on tires.
1. Consumption:
Households purchased 5,000 vehicles from Firm C for $20,000 each. Total consumption expenditure = 5,000 vehicles * $20,000 = $100,000,000.
2. Investment:
Firm C imported 5,000 engines from a foreign subsidiary for $5,000 each. Total investment expenditure = 5,000 engines * $5,000 = $25,000,000.
3. Government spending and net exports:
There is no information provided about government spending or net exports, so we assume they are zero.
Now, we can calculate GDP using the expenditure approach by summing up the various components:
GDP = Consumption + Investment + Government spending + Net exports
GDP = $100,000,000 + $25,000,000 + $0 + $0
GDP = $125,000,000
Therefore, the GDP in 2016 for this economy is $92,982,000 using the production approach and $125,000,000 using the expenditure approach.