Different Approaches of GDP Accounting

Q. 7.1
Peter operates a garage which provides customers with car repairing services. In March 2012 he bought a 5-year old second hand car from his customer at a price of $60,000. He paid his worker $5,000 to repair and clean up the engine, and then successfully sold the car to another customer for $68,000 in June 2012. Discuss how the 2012 GDP and its components were affected under the three different approaches of GDP accounting.

A garage was operated by Peter. In March 2012, he spent $60,000 buying a 5-years old second-hand car. Also, he paid his worker $5000 to repair and clean up the engine. In June 2012, he sold the car at $68,000. In Q7.1, It requires us to find the changes of gross domestic product (GDP). First, I would state the definition of GDP. GDP refer to the market value of all the final goods and services produced within a country in a given time period. Final goods and services are the goods and services that are produced for its final user and not as a component of another good or service. Therefore, we should not calculate the intermediate good or service in GDP. There are three approaches to calculate GDP. Three different approaches are expenditure approach, income approach and output approach. The expenditure approach measures GDP by using data on consumption expenditure, investment, government expenditure on goods and service, and net export. Using the expenditure approach, the changes of GDP is the changes of consumption expenditure on car services. As the wages of the worker is the intermediate services, we cannot count it in the expenditure approaches. Otherwise, we will have a double count problem. Final goods is the car $68000. Since the car is a 5-years old second car, it is used goods. $60000 is included in the GDP of 2007.
Consumption expenditure refer to the expenditure on consumption goods and services. $68000 minus $60000 is $8000. The consumption expenditure is increased $8000 so the GDP is increased $8000. The income approaches measures GDP by using data on wage income, interest, rent, and profit income. The wage of the worker is $5000. The profit of peter’s garage is $6000 ($68000- $5000-$60000). Therefore, the 2012 GDP is increased by $8000. GDP in output approaches is calculated by adding up the contribution to the final output of every firm in the economy. Stage of production is the repaired car. Value of output and intermediate input is $68,000 and 60,000 respectively. Therefore, the value added is $8000 ($68000-$60000). As a result, the GDP is increased $8000

Q. 7.2.
a) A Chinese-owned ice-cream producer operating and selling in the U.S. has the following accounting record related to its business during 2012:
:

Total sales revenue $1000
Total cost include the following
Wages paid to U.S. workers $500 Wages paid to Chinese workers $100 Interest pad to a U.S bank $40
Rent paid to a U.S landlord $60
Total cost $700

(i) What is the value of U.S. GDP contributed by this firm using the expenditure approach? Which component(s) of the expenditure approach will be involved?
(ii) What is the value of U.S. GDP contributed by this firm using the income approach? Which component(s) of the income approach will be involved?
(iii) How much is this firm’s contribution to the Chinese GNP?

b) If a Canadian tourist drinks German beer in a restaurant in New York City, how will the U.S. GDP be affected? Give you answer using both the expenditure approach the output approach?

In Q. 7.1 I have said the definition of GDP, GDP in expenditure approach, income approach and output approach. I would not repeat once more time. As the total revenue of the firm is $1000, we can conclude that the consumption expenditure is $1000. Therefore, the value of GDP contributed by the producer is $1000. The answer of Q 7.2(a)(i) is $1000. In Q.7.2 (a)(ii), it require us to find the contribution under income approach. It contribute by wages, interest, rent and profits. The amount of wages is $600. The values of interest, rent and profits is $40, $60 and $300 respectively. Therefore, the value of GDP contributed by the producer is $1000 (600+40+60+300) In Q.7.2 (a)(iii), it require us to find the firm’s contribution to the Chinese GNP. GNP is the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of the country. The wages paid Chinese workers and profits by the Chinese ice-cream producer is included the GNP of China. Therefore, the contribution to the Chinese GNP is $400 (300+$100). In Q.7.2 (b), we should find the effect of GDP when a Canadian tourist drinks German beer in a restaurant in New York City. In expenditure approach, the behavior of the tourist in New York City is the export of U.S. GDP. As the beer is come from German, the beer is the import of the U.S. GDP. If we assume the price of the beer and the cost of the beer is $x and $y respectively, the affected components using expenditure approach is exports and imports. The U.S. GDP will be increased $x-y. If we are using output approach, we should add up the contribution to the final output of every firm in the economy. As German beer is not produced by U.S., the value of German beer cannot be added to U.S. GDP. Assume that the price and the cost of beer are $x and $y respectively. The value of output is $x. The cost of intermediate input is $y. The value added is $x-y. As a result, $x-y is added to U.S. GDP.

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