Assume an economy with a coal producer, a steel producer, and some consumers( th

Question

Assume an economy with a coal producer, a steel producer, and some consumers( there is no govern- ment). In a given year, the coal producer produces 15 million tons of coal and sells it for $5 per ton. The coal producer pays $50 million in wages to consumers. The steel producer uses 25 million tons of coal as an input into steel production, all purchased at $5 per ton. Of this, 15 million tons of coal come from the domestic coal producer and 10 million tons are imported. The steel producer produces 10 million tons of steel and sells it for $20 per ton. Domestic consumers buy 8 million tons of steel, and 2 million tons are exported. The steel producer pays consumers $40 million in wages. All profits made by domestic producers are distributed to domestic consumers. (a) Determine GDP using (i) the product approach) the expenditure approach, and ii the income approach. (12 points) (b)Determine the current account surplus. (3 points) (c) What is GNP in this economy? Determine GNP and GDP in the case where the coal producer is owned by foreigners, so that the profits of domestic coal producer go to foreigners and not distributed to domestic consumers.(5 points)

Explanation / Answer

a) From the details given in the sum, the quantity, price, revenue and cost of each sector can be summed up as follows:

Sector

Quantity (Million Tons)

Activity

Revenue (TR) (Millions of $)

Cost (TC) (Millions of $)

Profit (TR-TC)(Millions of $)

COAL

15

Sell

15*5 = 75

50 (wages)

75-50= 25

STEEL

25 (15+10)

Buy

-

125 (Coal) + 40 (wages)

10

Sell

200

-

200-165 = 35

CONSUMER (Domestic)

8

Buy

-

160

-

CONSUMER (Foreign)

2

Buy

-

20

-

The GDP can be calculated using three ways:

(i) Product Approach: This method takes into account the Value Added at each step of production.

(ii) Expenditure Approach: In this example, there are two elements from the expenditure method. Usually the expenditure method has 4 components , Consumption (C), Investment (I), Government Expenditure (G) and Net Exports (NX = Exports – Imports)

(iii) Income Approach: In this example, there are two elements from the income method which are wages and profit.

b) The current account is given by: CA = NX + Net Income from abroad + Net Current Transfers

Here we only have NX which is Exports – Imports = $40 Million - $50 Million = -$10 Million.

Thus, CA surplus is negative or the current account is in deficit.

c) Gross National Product (GNP) = GDP + Net Factor Income From Abroad (NFIA).

Sector

Quantity (Million Tons)

Activity

Revenue (TR) (Millions of $)

Cost (TC) (Millions of $)

Profit (TR-TC)(Millions of $)

COAL

15

Sell

15*5 = 75

50 (wages)

75-50= 25

STEEL

25 (15+10)

Buy

-

125 (Coal) + 40 (wages)

10

Sell

200

-

200-165 = 35

CONSUMER (Domestic)

8

Buy

-

160

-

CONSUMER (Foreign)

2

Buy

-

20

-

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