Question

Problem 1 The American Manufacturing Company produces only one product. The firm purchases a key input at a price of $4 per unit of production. The firm then pays a wage rate of $6 per unit for the time that labor is exerted. In addition, $2 of indirect inputs is paid for each final unit of output produced. The firm sells every units of the product for $20. What is the contribution of each unit of output to GDP in the current year? Problem 2 Each year, Peter typically does all his own landscaping and yard work. He spends $160 per year on mulch for his flower beds, $240 per year on flowers and plants, $80 on fertilizer for his lawn, and $174 on gasoline and lawn mower maintenance. The lawn and garden store where he obtains his mulch and fertilizer charges other customers $390 for the service of spreading that much mulch in flower beds and $160 for the service of distributing fertilizer over a yard the size of Peter's. Paying a professional yard care service to mow his lawn would require an expenditure of $1,800 per year, but in that case, Peter would not have to buy gasoline or maintain his own lawn mower. a. In a normal year, how much Peter's landscaping and yard work contribute to GDP? b. Suppose that Peter has developed allergy problems this year and will have to reduce the amount of his yard work. He can wear a mask while running his lawn mower, so he will keep mowing his yard, but he will pay the lawn and garden center to spread mulch and distribute fertilizer. How much will all the work on Peter's yard contribute to GDP this year? C. As a follow-up to part (b), at the end of the year, Peter realizes that his allergies are growing worse and that he will have to arrange for all his landscaping and yard work to be done by someone else next year. How much will he contribute to GDP next year?

Answer 1

1. Ans - The contribution of every unit will be equal to the final value of the good being sold in the market. Thus the GDP will get a positive item of $20 from each unit. The GDP includes final value of all goods and services produced within the geographical boundaries of the economy. Thus $20 will be contributed from each product, which is the final value of the product.

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