Application Problems Chapter 7 and 8

Application Problems Chapter 7 and 8 - Application...

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BA206 Macroeconomics Robert McGill 18 Oct 2011 Chapter 7
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...... 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 Production Sale Price Farmer $0.30 Miller $0.50 Wholesaler $1.00 Grocer $1.50 The income approach totals the receipts for all of the factors of production and others who receive money because of the process. The expenditure approach totals the amount spent on total consumption, investments, government purchases, and net exports. Value added means that at each stage from basic raw materials to final good, someone is adding something to the cost that the final consumer will pay. When someone is paid at any given stage, their money received will be added to GDP as income using the income approach (for the expenditure approach, only the sale to the final consumer is added to GDP, and only in the year of production; otherwise the value added is just lumped into the investment category). For this example, the farmer produces wheat; his payment of $0.30 is the amount of value added, and the amount added to GDP. The miller takes that wheat and turns it into flour; his payment of $0.50 includes his cost of $0.30 plus his value added of $0.20, and $0.20 is added to GDP at that stage. The wholesaler makes this available in quantities and locations that will satisfy the retailer; his payment of $1.00 includes his cost of $0.50 plus his value added of $0.50, and $0.50 is added to GDP at that stage. The grocer, who is the final retailer, makes this available to individuals in the public in quantities and locations convenient for them; his payment of $1.50 includes his cost of $1.00 plus his value added of $0.50, and $0.50 is added to GDP at that stage. The $1.50 selling price for the grocer is the final market value of the flour.
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This note was uploaded on 11/16/2011 for the course BUSINESS BA206 taught by Professor Various during the Spring '11 term at Grantham.

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Application Problems Chapter 7 and 8 - Application...

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