Question

Suppose there are only three firms in an economy. Firm A grows crops and extracts minerals from its land with no inputs from other firms. Its sales are $200million annually, half of which goes to households and half to firms B and C in equal amounts. Firm B buys inputs from A and sells its entire output of $400million to Firm C. Firm C buys inputs from A and B and sells its $900million output directly to consumers (though 20% of this is overseas). What is GDP at basic prices? If there is only one tax – VAT at 10% - what is GDP at market prices

Answer 1

Company A: output=$\$200$m per year

$100m to consumers and $\$100m$to company B&C

Company B: input $\$50m$  

Output $\$400m$  to company C

Company C: input $\$400m$from company B

Input $\$50m$  from company a

Output $\$900m$  to consumers (180m will go as exports)

GVA at basic prices

Company A:

$\$ 200m−0=\$ 200m$

Company B:

$\$ 400m−50m=\$ 350m$

Company C:

$\$ 900m−450m=\$ 450m$

GVA=$\$200+\$350+\$450=\$1000$

Value added Tax:

$0.1×(1000 m−180m)=\$82m$

GDP at Market Price: $\$ 1000m+\$82m=\$1082m$

GVA at basic prices is output at basic prices minus intermediate consumption at purchaser

prices. The basic price is the amount receivable by the producer from the purchaser for a unit of a product minus any tax on the product plus any subsidy on the product