The small economy of Pizzania produces three goods (bread, cheese, and pizza), e
ID: 1227731 • Letter: T
Question
The small economy of Pizzania produces three goods (bread, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all the inputs they need to make bread and cheese, respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labor to help produce their goods, and the difference between the value of goods sold and the sum of labor and input costs is the firm’s profit. The accompanying table summarizes the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas.
a. Calculate GDP as the value added in production.
b. Calculate GDP as spending on final goods and services.
c. Calculate GDP as factor income.
Explanation / Answer
a GDP as the value added in the production = value of production - value of intermediate goods
GDP as the value added in the production = value of bread + value of cheese + (value of Pizza - value of cheese and bread)
GDP as the value added in the production = 50 + 35 + (200 - (50 + 35))
GDP as the value added in the production = 200
b GDP as spending on final goods and service = Spending on pizza(as pizza is the final good) = value of Pizza
GDP as spending on final goods and service = 200
c
Profit in cheese company = Value of Output - Wage = 50 - 15 = 35
Profit in Bread company = Value of Output - Wage = 35 - 20 = 15
Profit in Pizza company = Value of Output - Wage i Inputs = 200 - 75 - 80 -35 = 40
GDP as factor INcome = Wages in three companies + Profits in three companies
So, GDP as factor INcome = 15 + 20 + 75 + 35 + 15 + 40 = 200
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