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Factor market
Factor Incomes
Household
sector
Firms sector
Goods and Services
Expenditure
Product
market
Firms
sector
Expenditure
L
E
A
K
A
G
E
S
Savings
Financial
sector
Investment
I
N
Savings J
E
C
T
I
O
N
S
Firms
sector
Expenditure
L
E
A
K
A
G
E
S
Savings
Taxation
Financial
sector
Government
sector
Investment
Government
expenditure
I
N
J
E
C
T
I
O
N
S
Firms
sector
Expenditure
L
E
A
K
A
G
E
S
Savings
taxes
Financial
sector
Government
sector
Rest of the
world
Investment
Government
expenditure
Receipts from
Exports
I
N
J
E
C
T
I
O
N
S
Payments on
imports
What is GDP?
Gross Domestic Product (GDP) is the total market value of all final
goods and services produced in an economy in a one-year period.
GDP is a measure of final output per year.
It is the single most-used economic measure.
There are 4 kinds of transactions that are NOT included in GDP.
1.
2.
3.
4.
Non-Market Activities
Unreported Incomes
Intermediate Goods
Second hand transactions
Product method
Value added method - measures the value added by each producing
enterprise in the production process in the domestic territory of a
country on an accounting year.
Final stage value
harvest wheat
Miller
Baker
Generated
Added
$100
$100
200
100
300
100
Rs. 600
Rs. 300
GVAi =Value of sales by the firm(Vi)+ Value of change in inventories (Ai)- value of the
intermediate good used by the firm (Zi)
Income method
Sum of the incomes received by all the factors of production,
that is, Salaries, Wages, Profits, Interest and Rents
GDP= W + P + I + R
Expenditure method
GDP is equal to the sum of the four categories of expenditures.
GDP = C + I + G + (X - M)
Four components:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX=X-M)
# Problem
Mangoland is a closed economy where people live only on mango juice. There is only one farm that produces
mango and a single company that manufactures mango juice. In 2010, the mango farm produced 10
mangos and sold them to mango juice company at Rs. 1 each. The mango juice company produced 3 bottles
of mango juice, and sold them all at a unit price of Rs. 10 plus 10% indirect tax collected by the govt. (So the
price paid was actually Rs. 11). The mango farm paid total wages of Rs. 6. The mango juice company paid
total wages of Rs. 10. both companies retained their 50% net profits after depreciation and paid the rest of
it as dividends to the households. After receiving their wage income and their dividends, the households
paid 10% direct tax on their total income to the govt. the govt. bought one mango juice for Rs. 11. The govt.
made no social transfer. Notice that the entities are not paying any direct taxes on their retained profits.
Compute the GDP of mango land using
(1) Income method
(2) Value added method and
(3) Expenditure method.