Question

GDP accounting - understanding GDP accounting helps us to better understand what GDP is measuring, and helps us to understand how economics grow. Here is a simple example The farmer grows oranges and sells them to the retail store The retail store produces orange juice and sells it to consumers The retail store produces 200 gallons of juice (cost of S8/gallon) and sells 180 gallons to consumers for S10/gallon The retail store pays the farmer $800 of which $700 is wage income and $100 is profit for the farmer The retail store pays wage income of $600 to its employees and rent of S200 on their store There are no other costs or expenses Find the followin g values: * Consumption- Investment GDP- Total expenditure - Value added farmer- . Value added retail- Total value added- . Wage income Rental income-- Profit income- Total income-

Need help, please show work

Answer 1

As per the given information :

Transactions done by the Retailer
Cost of Juice per gallon	$8
Quantity of Juice produced	200
Quantity of Juice Sold	180
Price of Juice per gallon	$10
Wages paid to the employees	$600
Rent paid for the store	$200
Taxes paid to the government	$0

Transactions done by the Farmer
Revenue Received from sale of Oranges	$800
Profit	$100
Wage Income	$700
Taxes paid to government	$0

1. The Expenditure Approach measures economic activity by summing the amount spent by the ultimate users of output. According to Expenditure Approach, GDP can be measured as follows:

GDP = Consumption (C) + Investment (I) + Government Expenditure (G) + Net Exports (NX)

Consumption, C = Price of Juice x Quantity of Juice Sold by the Retailer = $10/gallon x 180 gallons = $1800.
This is because the retailer is not the end user of oranges. The households who purchase juice from him are the final consumers.

Investment, I = Total change in inventory of retailer
                     = [Quantity of Juice Produced – Quantity of Juice Sold] x Price of Juice per Gallon
                     = [200 -180] x $ 10/gallon = $200.

Government Expenditure, G = 0.

Net Exports, NX = 0.

Thus, GDP = C + I = $1800 + $ 200 = $2000.

2. Value Added or Product Approach measures economic activity by summing the market value of goods and services produced in an economy, excluding the value of intermediate goods and services which are consumed in the production process.

Gross Value Added, GVA_MP = Value of Output (VO) – Intermediate Consumption (IC)

GDP_MP = ∑GVA_MP

Value Added Farmer = Value of Oranges produced = $800

Value Added Retailer = Value of Juice produced + Change in inventory – Intermediate Consumption of Oranges
                                       = $1800 + $200 - $800 = $1200.

Total Value Added = Value Added Farmer + Value Added Retailer
                                  = $800 + $1200 = $2000.

3. Income Approach measures economic activity by equating total output of an economy to the total factor income received its residents.

GDP = Compensation of Employees ( Income received from work ) + Operating Surplus ( Income received from property [rent] and entrepreneurship [profits] ) + Mixed Income ( Income earned by self – employed and unincorporated enterprises) + Net Income from Abroad (NFIA)

Wage Income = Wage Income of the farmer + Wage income of retail store employees = $700 + $600 = $1300.

Rental Income = Rent paid by the retailer for the store = $200.

Profit Income = Profit of farmer + Profit of Retailer
                         = $100 + Quantity of Juice Produced x [Price of Juice per gallon – Cost of Juice per gallon]
                         = $100 + 200 gallons x [$10/gallon - $8/gallon]
                         = $100 + $400.
                         = $500.

Thus, Total Income = Wage Income + Rental Income + Profit Income
                                   = $1300 + $200 + $500 = $2000.