(Income approach to GDP) How does the income approach to measuring GDP differ from the expenditure approach?
How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value-added and its importance in the income approach. Consider the following data for the selling price at each stage in the production of a 5-pound bag of flour sold by your local grocer. Calculate the final market value of the flour.
Stage of the Production
Sale price
Farmer
$0.30
Miller
$0.50
Wholesaler
$1.00
Grocer
$1.50
(Income approach to GDP) How does the income approach to measuring GDP differ from the expenditure approach?
How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value-added and its importance in the income approach. Consider the following data for the selling price at each stage in the production of a 5-pound bag of flour sold by your local grocer. Calculate the final market value of the flour.
| Stage of the Production | Sale price |
| Farmer | $0.30 |
| Miller | $0.50 |
| Wholesaler | $1.00 |
| Grocer | $1.50 |
Related textbook solutions
Related questions
The expenditure and resource cost-income approaches to calculating GDP arrive at the same final number, but they calculate that number in different ways. To illustrate, consider the possible effects of the following transactions on GDP:
| 1. | Ralph pays The Home Station $1,200 to plant a new lawn in his backyard. He's attracted by The Home Station's guarantee that he'll be happy with the new lawn, or he'll get his money back. | ||||||||||||||||
| 2. | The Home Station pays Al's Lawn Care $850 to plant the lawn. | ||||||||||||||||
| 3. | Al's Lawn Care buys grass seed worth $200 from Green Center Nursery. Compute contributions to GDP, using the expenditure approach. Assume that Green Center Nursery receives the grass seed at no charge and that other costs are zero. Hint: Add the amount of money spent by buyers of final goods and services. Which of the following would be included in the expenditure method of calculating GDP? Check all that apply. -The Home Station spends $850. -Ralph spends $1,200. -Al's Lawn Care spends $200. The total contribution to GDP, measured by the expenditure method, is $______ Now use the following table to compute contributions to GDP, employing the resource cost-income approach. In particular, indicate the costs of intermediate goods and the value-added at each stage of production.
The contribution to GDP that you found using the expenditure approach corresponds to the sum of the _____ at each stage of production. |
All the following transactions take place during the same year.
Assume that a farmer rents a 20-acre farm in the White Creek Valley. During the current year, the farmer produces 100,000 bushels of wheat that he sells to a miller for $300,000 using various farming equipment. The farmer had to borrow from the bank to buy the farming equipment and pay $50,000 interest. Finally, the labor costs are $200,000 and the rent he pays to the owner of the land is $30,000.
The miller produces and sells to "Bang Bakery" in Newark 1,000 lbs of flour worth $600,000. The flour is produced in a $100,000 mill in Hockessin; no rent is paid, the wage bill is $180,000 and interest payments are $70,000. Finally, "Bang Bakery" makes and sells bread to Newark consumers for $1,000,000. The rent for their factory and their stores is $100,000 their interest payments are $50,000 - their wage bill, $300,000. It was not a good year for "Bang Bakery"
Calculate the contribution to GDP of these transactions using three different methods:
(8 points) The value-added approach
Value added by the farm:
Value added by the mill:
Value added by the bakery:
Total value added:
(8 points) The income approach (fill the table and explain how you obtain the values)
|
Various forms of income (Name the categories) |
Total |
||||
|
farm: |
$ |
$ |
$ |
$ |
$ |
|
mill: |
$ |
$ |
$ |
$ |
$ |
|
bakery: |
$ |
$ |
$ |
$ |
$ |
|
Total |
$ |
$ |
$ |
$ |
(4 points) The expenditure approach
