Assume an economy with two rms. Firm A produces wheat and rm B produces bread. In a given year, rm A produces
50,000 bushels of wheat, sells 20,000 bushels to rm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and
stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread,
and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the
50,000 loaves of bread consumers buy from rm B, consumers import and consume 15,000 loaves of bread, and they pay
$1 per loaf for this imported bread. Calculate gross domestic product for the year using

(a) the product approach,
(b) the expenditure approach, and
(c) the income approach.

Firm B pays $60,000 to firm A for 20,000 bushels of wheat, which is an intermediate input. Firm B’s value added is therefore $40,000. GDP is therefore equal to $190,000.

(b) Expenditure approach:

Consumers buy 50,000*$2/loaf and 15,000*$1/loaf.

Consumption spending is therefore equal to $100,000 + $15,000 = $115,000.

Firm A adds 5,000 bushels* $3= $15,000.

Firm A exports 25,000 * $3= $75,000.

Consumers import 15,000 * $1=$15,000.

Net exports are equal to $75,000- $15,000 = $60,000. There is no government spending. GDP is equal to consumption ($115,000) plus 3 investment ($15,000) plus net exports ($60,000). G

DP =$190,000.

(c) Income approach:

Firm A pays $50,000 in wages+ Firm B pays $20,000 in wages= $70,000. Firm A produce $150,000 - $50,000 in wages=. $100,000 profits.

Firm B produces $100,000 -$20,000 in wages- $60,000 to Firm A for wheat=$20,000 profits

Total profit income in the economy equals $100,000+ $20, 000 = $120,000. Total wage income ($70,000) plus profit income ($120,000) equals $190,000. GDP is therefore $190,000.

Explanation: