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Consider an economy with a corn producer, some consumers, and a government. In a given year, the corn producer grows 30 million bushels of corn and the market price for corn is $5 per bushel. Of the 30 million bushels produced, 20 million are sold to consumers, 5 million are stored in inventory, and 5 million are sold to the government to feed the army. The corn producer pays $60 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 Social Security payments from the government. The profits of the corn producer are distributed to consumers.

Required:
a. Calculate GDP using (i) the product approach, (ii) the expenditure approach, and (iii) the income approach.
b. Calculate private disposable income, private sector saving, government saving, national saving, and the government deficit. Is the government budget in deficit or surplus?

Respuesta :

Tundexi

Answer:

a. GDP using product approach

There are no intermediate goods inputs. Corn producer grows 30 million bushels of corn and each bushel of corn worth is $5.

GDP = 30 million * $5

GDP = $150 million

GDP using expenditure approach

i) Consumers buy 20 million bushels of corn

Consumption = 20 million * 5

Consumption (C) = $100 million

ii) Corn producer adds 5 million bushels to inventory

Investment = 5 million * $5

Investment (I) = $25 million

iii) Government buys 5 million bushels of corn  

Government spending = 5 million * $5

Government spending (G) = $25 million

GDP = C + I + G

GDP = $100 + $25 + $25  

GDP = $150 million

GDP using income approach

Profit income = $150 million - $60 million - $20 million

Profit income = $70 million

Government income = Taxes paid by the corn producer = $20 million

GDP = $60 million + $70 million + $20 million

GDP = $150 million

b. Private disposable income = GDP + Net factor payments + Government transfers + Interest on the government debt - Total taxes

Private disposable income = $150 million + 0 + $5 million + $10 million - $30 million

Private disposable income = $135 million

 

Private savings = Private disposable income - Consumption

Private savings = $135 million - $100 million

Private savings = $35 million

Government savings = Government tax income - Transfer payments - Interest on the government debt - Government spending

Government savings = $30 million - $5 million - $10 million - $5 million

Government savings = $10 million

National savings = Private savings + Government savings

National savings = $35 million + $10 million

National savings = $45 million

Government budget surplus = Government savings = $10 million

Government deficit = (-) $10 million

chilljain33

The correct amounts of different calculations in an economy with corn producer, consumers and government are as follows,

1. GDP as per product approach will be $150 million.

2. GDP as per the expenditure approach will be $150 million.

3 GDP as per the income approach will be calculated as $150 millions.

4. The net disposable income will be calculated as $135 million.

5. The private sector savings will be calculated as $35 million.

6. The government savings will be $10 million.

7. The National savings will be calculated as $45 million

8. And the government budget surplus is calculated as $10 million.

The calculation of financial status of an economy

  • The calculation of GDP can be done using the different approaches by using different formulas and putting the given values.

  • [tex]\rm GDP\ Product\ Approach= \$30\ x\ 5\\\\\rm GDP\ Product\ Approach= \$150\ million[/tex]

  • Using expenditure approach,

  • [tex]\rm GDP = \$(100+25+25)\ million\\\\\rm GDP= \$150\ million[/tex]

  • Using Income approach

  • [tex]\rm GDP = \$(60+70+20)\ million\\\\\rm GDP = \$150\ million[/tex]

  • Now calculating private disposable income

  • [tex]\rm Private\ disposable\ income = GDP\ + Net\ factor\ payments\ + Government\ transfers\ + Interest\ on\ the\ government\ debt\ - Total\ taxes\\\\\rm Private\ disposable\ income = \$(150 + 0 + $5\ + $10\ - $30) \rm million\\\\\rm Private\ Disposable\ Income= \$135\ million[/tex]

  • Now calculating Private Sector Savings

  • [tex]\rm Private\ Savings = Private\ Disposable\ Income\ - Consumption\\\\\rm Private\ Savings = \$(135-100)\ million\\\\\rm Private\ Savings= \$35\ million[/tex]

  • Now calculating government savings,

  • [tex]\rm Government\ Savings\ = Government\ Tax\ Income\ - Transfer\ Payment\ - Interest\ Government\ Debt\ - Government\ Spending\\\\\rm Government\ Savings\ = \$(30 - $5 - $10 - $5) \rm million\\\\\rm Government\ Savings\ = \$10 million[/tex]

  • Now calculating National Savings

  • [tex]\rm National\ savings\ = Private\ savings\ + Government\ savings\\\\\National savings = \$(35 \ + $10) \rm million\\\\National\ savings = \$45\ \rm million[/tex]

  • Now calculating government deficit\surplus

  • [tex]\rm Government\ Budget\ Surplus = Government\ Savings\\\\\rm Government\ Budget\ Surplus = \$10 million[/tex]

Hence, the different financial calculations regarding the standings of the economy as on such date are as aforementioned, and it can be concluded that the government budget is in surplus.

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