LO 1 Assume an economy with a car manufacturer, a car seller, and some consumers (there is no government).

The consumers are workers who earn a wage to inance their consumption. In a given year, the car manufacturer produces 50,000 cars and sells them for $10,000 per car. The workers’ wages take up 70% of the car manufacturer’s revenue. All the materials used for producing cars are imported from other countries at a cost of $1,000 per car.

Half of the manufactured cars are exported overseas and the remaining cars are sold to the domestic car seller. The car seller sells the domestic cars and imported cars at the same price of $14,000 per car. The car seller sells all of the domestic cars and 5,000 of the imported cars to domestic consumers.

After paying $6,000 for the cost of an imported car, the remaining sales revenue is equally distributed between wages and proits.

(a) Calculate GDP using (i) the product approach, (ii) the expenditure approach, and

(iii) the income approach.

(b) Calculate the current account balance. Does the economy have a current account surplus or deicit?

(c) Suppose that the car manufacturer is a foreign entity and all of its proits belong to foreigners.

What would GNP and GDP in this economy be in this case?