2 GDP and Measurement (20 points) Consider an economy with a corn producer, some

Question

2 GDP and Measurement (20 points) Consider an economy with a corn producer, some consumers, and a government. In a given year, the corn producer grows 3 million tonnes of corn, and the market price for corn is $50 per tonne. Of the 30 million tonnes produced,2 million tonnes are sold to consumers, 0.5 million are stored in inventory, and 0.5 million are sold to the government to feed the army. The corn producer pays S60 million in wages to consumers and $20 million in taxes to the government. Consumers pay $10 million in taxes to the government, receive $10 million in interest on the government debt, and receive $5 million in Canada Pension Plan payments from the government. The profits of the corn producer are distributed to consumers. 1. Calculate GDP using i) the product approach) the expenditure approach, and ii) the income approach 2. Calculate private disposable income, private sector saving, government saving, national saving, and the gov- ernment deficit. Is the government budget in deficit or surplus?

Explanation / Answer

1. Calculation of GDP:

a) Product approach = $50*3 million = $ 150 million ( as corn is the only good produced, we use corn product only)

b) Expenditure approach = consumption expenditure + government expenditure + investment expenditure

=($50 * 2 + $ 0 *0.5 + $50 *0.5) million = $150 million

( inventory are treated as investment expenditure for the current year).

c) Income approach = wages + profits of corn producer + profit/savings of government

= $60 + $70+ $20 = $150 million.

Note: profits of corn producer = $(150 - 60- 20) = 70 million

profit/savings of government = (20+10-10) = $ 20 million.

2. private disposable income = $( 60 + 70 + 5 + 10 -20 - 10) = $115 million.

private sector savings = $(115- 2*50) = $15 million.

government sector savings = $(20 + 10 - 5 -10 - 0.5*50) = -10 million ( it is actaully a deficit of 10 million)

national savings = 15-10 = $ 5 million.

government deficit = 10 million

Clealrly, the government budget is in deficit of $ 10 million.

Thanks!

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.