I have an exam tomorrow in Princ. of Macroeconomics, and I‘m having trouble with the question below. I‘m aware of the expenditure method GDP C + I + G + (EX - IM). In calculating GDP by the expenditure method, there are two ways to avoid the double counting of intermediate goods. Demonstrate your understanding of these two methods by showing how both produce the same calculation of contribution to GDP. Assume the following: 1) Iron ore is produced by iron mining, which is sold to steel makers for $30 million (we will make the simplifying assumption that iron mining uses no intermediate goods). 2) The iron ore is all used to make steel, which is sold to automobile makers for $100 million. 3) The steel is all used to make automobiles, which are sold to dealers for $250 million. 4) All of the automobiles are sold by the dealers to consumers for $350 million. What are the two methods, and what contribution to GDP can be calculated by each method, from the above assumptions?
sorry. Your exams are over. Value added of each activity is a measure of its contribution to GDP. Given the data and the simplifying assumtions, the contribution/ value added is: Iron Ore mining: $30 million (nothing is said to be consumed as raw material here) minus depreciation if any Steel Making: $100 milion- $ 30 million - ( other raw material costs like coke and depreciation) if any $70 million if there are no otrher costs on intermediates and depreciation Automile manufacturing : $250- $100 i.e., $150 million assuming no depreciation and no other intermediates used. Automoble Retailing: $(350-250) million $100 million under simplifying assumptions. The above is both the Value added or Income method and also the Expenditure Method (if you go in the reverse order from final car backwards to iron ore mining. Because, it is the cars which is the final good that is being consumed and enters as part of C in the equation GDP C + I + G + (EX - IM).
