Answer to Question #234859 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

$$solution$$

$(1)Revenue\ refers\ to \ the \ sales \ value.\ Thus, \ the\ final \ value \ of \ the\\ product \ is\ revenue\ from\ car\ sales(f2)= K3000.\\ (2)Total \ value \ added \ =\ Revenue\ from \ car \ sales\ - \ Revenue f\ rom\ sales\ of\ iron = K3000 - K1500 = K1500\\ (3) Total \ income \ = \ Income \ of \ workers \ in\ Firm \ 1\ and\ 2 + \\Profit\ for\ firm \ 1 \ and \ 2 \ = K1000 +K750+K500+K750=K3000\\$

(4)-Types of Goods and Services: It is difficult to determine which goods and services should be included or excluded in computation of national income.

-The Risks of Double Counting: Double counting implies the possibility of a commodity like raw material or labor being included in national income more than once. The best way to avoid this difficulty is to calculate only the value of all goods and services that enter into final consumption.

-computation of illegal and unlawful activities: whether economic or not they are omitted from national income computations. They are not included since these operations are unlawful and so cannot be included in national income accounts.