Consider an economy that produces wood, boats, and has a marketing agency. This year domestic wood production generates revenues of $80. Of this $80 worth of wood, $40 were purchased by the boat producer and $40 were sold abroad to a foreign company. The wood producer paid $40 worth of wages and $10 worth of taxes. The boat producer combines the services of the marketing agency, the wood it purchased from the wood producer, and $20 worth of labor (wages) to produce $120 worth of boats. Its revenues, which include a boat produced in the previous year and that was carried as inventory, are $130. Domestic families buy all these boats. This company pays $10 worth of taxes. The marketing agency, whose sole client is the boat company, generates a revenue of $40 which is enough to cover its labor costs of $40. This company pays no taxes. The government in this economy uses the $20 worth of taxes and builds a port. The cost of the port is $40 that are paid to workers. This port is partially financed by an international loan of $20.

a) Summarize this information in a table similar to the one used in the lecture notes.

b) Calculate GDP using the three alternative approaches. Show your derivations.

c) Calculate the government budget/deficit. Show your derivations.

d) It turns out that the international loan never arrives and the government is forced to increase taxes by an additional $20 for the wood producer. Recalculate GDP in this alternative scenario.

e) Imagine that the owner of the marketing agency succeeds to lower the wage of the workers it employs to $20 and now it makes $20 worth of profits. Assume taxes for this company remain at 0. How does GDP change? Explain your answer.