Answer to Question #234857 in Macroeconomics for john k

Question

Consider an economy with two firms. Firm 1 produces iron, employing workers and using machines to produce the iron. It sells the iron for K1500 to Firm 2, which produces roofing sheets. Firm 1 pays its workers K1000, leaving K500 in profit to the firm.

Firm 2 buys the iron and uses it, together with workers and machines, to produce roofing sheets. Revenues from car sales are K3000. Of the K3000, K1500 goes to pay for iron and K750 goes to workers in the firm, leaving K750 in profit to the firm.

Required

1. What is the final value of goods produced? (5 marks)
2. What is the total value added? (5 marks)
3. What is total income? (5 marks)
4. Discuss three complications in computing national income.

Answer 1

1.

The final value of goods produced is the amount the customer paid for a particular good and service and the amount that the firm has set after including all factors of production. 

Here, The final value of Iron produced is K1500 and the final value of roofing sheets is K3000. 

2.

The total value added means the market price of the final good and service that is produced by the firm. It only counts production of goods and services in particular given period of time. The total value added is a basis at which the taxes are calculated for that particular goods and services. 

3.

Total Income means all the income of an individual after paying all the debts and deduction of all the taxes. Total income is the actual amount left with an individual after he paid all his debts and taxes. This income can be divided into expenditure, savings and investments.  

4.

The three complications in computing national income are: 

• Types of goods and services - The main complication in computing national income is that what type of goods and services should be included while calculating national income as there are many goods and services that do not have a value in monetary terms. Services that are offered out of love, humanity, duty, care and concern do not have any monetary value. A lady who does all the household work for her family is not paid but she is working all day, thus, this has no monetary value. Such things are not included in national income. 
• Double counting - Another difficulty is of double counting. Double counting means that the cost of a good or service is taken twice and thrice in the national income which creates problems. To avoid this, the final consumption by the consumer should only be considered. 
• Depreciation - Another difficulty while calculating national income is of depreciation. Depreciation means that the monetary value of a good or service is decreased either due to damage or due to its age. A new vehicle has a higher price than an old one. Why? It is because the old vehicle is already used and may have some issues with less life which results in less monetary value. Thus, depreciation of goods and services creates difficulty while calculating national income.