Answer to Question #269996 in Macroeconomics for rizal

Question

 Robinson Crusoe produces upper-loop product of $1000. He pays $750 in wages, $125 in interest, and $75 in rent. What must his profi t be? If three-fourths of Crusoe’s output is consumed and the rest invested, calculate Crusoeland’s GDP with both the product and the income approaches and show that they must agree exactly. 

Answer 1

Profit is given by total revenue less all expenses(total cost) incurred

Robinson crusoe revenue is $\$ 1000$

Robinson crusoe expenses;

Rent $\$75$

Interest $\$125$

Wages $\$750$

Total expenses = $\$950$

Profit = 1000 - 950

Profit = $\$50$

GDP;

Product approach

GDP = C + I

Consumption is three quarters of 1000 = 750

Investment = 1000- consumption

Investment= 1000- 750

Investment = 250

Therefore GDP = 750 + 250

GDP= $\$1000$

INCOME APPROACH

GDP = Wages + Rent + Interest + Profit

GDP = 750 + 75 + 125 + 50

GDP = $\$1000$

Conclusion, both product approach and income gives the same GDP of $1000.