Question

The bikes of Econoland are produced by Bike Co. which produced 30 bicycles at a price of $10 per bike. The cost of producing each bike was $8 and was split between labor costs ($5 per bike) and parts ($3 per bike). Bike Co. sources its parts entirely from Parts Co. Parts Co. has $60 worth of costs which entirely consist of wages. Assume that both Bike Co. and Parts Co. are located in Econoland and use domestic labor.

(a) Using the Expenditure appronch compute the total contribution of Bike Co. and Parts Co. to the GDP of Econoland.
(b) Repeat the same exercise with the Product approach.
(c) Repeat the same exercise using the Income approach. Now suppose that Part Co. foreign owned company, located in a foreign country and uses entirely foreign labor
(d) Using the Product approach compute the total contribution of Bike Co. to the GDP of Econoland.
(e) Repeat the same exercise with the Expenditure approach. (Hint: think about net exports).
(f) Repeat the same exercise using the Income approach

Answer 1

To calculate GDP, the Expenditure approach considers total spending, the Product approach values goods and services produced, and the Income approach sums the incomes earned. With foreign production, imports are subtracted and only domestic-derived incomes count. Calculations show different GDP contribution figures based on these approaches.

Step-by-step explanation:

The student's question involves calculating the gross domestic product (GDP) of Econoland using different approaches, considering Bike Co. and Parts Co.'s economic activities under two scenarios: domestic production and foreign-owned parts production.

(a) Expenditure Approach: For Bike Co., sales of 30 bicycles at $10 each totalling $300, and for Parts Co., parts sales of $60 (as these are intermediate goods), we get a GDP contribution of $360.

(b) Product Approach: The value of the bikes produced by Bike Co. is $300. Since Parts Co. is creating parts within Econoland, its production is also included in GDP, hence $300 + $60 (value of parts produced by Parts Co.), for a total of $360.

(c) Income Approach: Considering labor costs and parts costs, the total income generated is the sum of wages paid by both Bike Co. and Parts Co. ($5 * 30 bikes + $60 for Parts Co.) which sums to $210.

(d) Product Approach: Here, only Bike Co.'s production is considered, excluding the value of parts from Parts Co., hence $300 remains as GDP contribution.

(e) Expenditure Approach: Exports remain the same at $300, but we must subtract the imports (cost of parts now coming from abroad), which is $3 per bike for 30 bikes, hence $300 - $90 = $210 as GDP contribution.

(f) Income Approach: In this scenario, only domestic wages are counted. Since Parts Co. labor is foreign, we only count Bike Co. wages, which is $5 per bike for 30 bikes, totaling $150.