Question
Consider a small agricultural economy, which grows only potatoes. There is a potato producer in the economy, which grows 9 million pounds of potatoes each
Consider a small agricultural economy, which grows only potatoes. There is a potato producer in the economy, which grows 9 million pounds of potatoes each year, out of which:
6.5 million pounds are sold to domestic consumers at $2 per pound,
2 million pounds are exported (at the same price) and the remaining
0.5 million pounds are stored for the next period (in order to replant potatoes again).
In order to grow these potatoes, the potato producer must use fertilizer which is only produced abroad. Suppose that the potato producer buys 0.4 million pounds of fertilizer from a foreign producer at the price of $5 per pound. It also pays $8 million in wages to its employees and $3 million in taxes to the government. The profit of the potato producer is paid to the consumers in form of dividends.
The government collects taxes from the potato producer and the consumers and uses the total tax revenue in order to finance the supply of utilities (water, electricity, and heating), which are provided to the economy's consumers for free. The government pays $3 million in wages to the workers employed in the utility services (who take care of all repairs of plumbing, cables, etc and other maintenance) and buys from abroad one million gallons of gas at a price of $2 per gallon in order to provide heating.
(a) For each of the three agents in this economy, list all revenues and expenditures. All the budgets must be balanced (i.e. revenues = expenditures for each agent). Note that you have to calculate yourself the amount of dividends paid to the consumers as well as the amount of taxes that consumers pay to the government.
(b) Calculate annual GDP of this economy using the value-added approach.
(c) Calculate annual GDP of this economy using the expenditure approach.
(d) Calculate annual GDP of this economy using the income approach.
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