Question

Consider an economy with only two businesses, called OrangeInc and JuiceInc. OrangeInc owns and operates orange groves. It sells some of its oranges directly to the public, making $10,000. It sells the rest of its oranges to JuiceInc, making $25,000. JuiceInc uses the oranges it acquires to produce and sell orange juice to the public. The total revenue of JuiceInc is $40,000. What is the value added by each business? Compute GDP using the Product Approach and using the Expenditure Approach.

Answer 1

Answer: (a) $35,000 and $15,000

(b) $50,000

(c) $50,000

Step-by-step explanation:

Given that,

OrangeInc sells some of its oranges to the public and making = $10,000

Remaining oranges sells to JuiceInc, making = $25,000

Total revenue of JuiceInc = $40,000

(a) Value added by OrangeInc = $10,000 + $25,000

= $35,000

Value added by JuiceInc = Total revenue - Oranges purchased from OrangeInc

= $40,000 - $25,000

= $15,000

(b) GDP using the Product Approach:

GDP = Value added by OrangeInc + Value added by JuiceInc

= $35,000 + $15,000

= $50,000

(c) GDP using the Expenditure Approach:

In our case, the final consumers of oranges are households. Households purchases oranges worth of $10,000 from OrangeInc and juice worth of $40,000 from JuiceInc.

Therefore,

GDP = $10,000 + $40,000

= $50,000