Consider an economy with two firms and a government.
Firm 1 produces 10000 units of good...
Business, 10.03.2020 22:34, jadenicole908
Consider an economy with two firms and a government.
Firm 1 produces 10000 units of good X, which it sells for $20 per unit. It uses this revenue to pay $140000 in wages, $10000 in taxes, and $10000 in interest on a loan, with the rest as profits. Firm 1 sells some of its output to consumers, and some to
Firm 2 as an intermediate good in their production process. Firm 2 uses good X as an input into its manufacturing process. It buys 8000 units of good X and uses them to create 1000 units of good Y, which it sells for $400 per unit. It pays $200000 in wages and $20000 in taxes, with the rest as profits.
The government takes in taxes from only these two firms, and uses it to pay wages to provide government services, for instance national defense.
b) A foreign competitor enters the market for good X. Consumers and firm 2 still consume the same level of good X; however, Firm 1 now only produces 8000 units of good X, with the foreign firm selling 2000 units of good X (1000 to consumers and 1000 to Firm 2). Firm 1 pays the same wages and taxes as it did when it sold 10 000 units of good X.
Question: It is discovered that this "foreign" firm is actually owned by Firm 1, but is located outside of the country. Re-calculate GDP (gross domestic product) from part (b). What, if anything, does this tell you about the difference between GDP and GNP?
Answers: 2
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