Answer to Question #132687 in Microeconomics for Anas

Question

Q5: (a) Suppose that in Year 1 a firm produces 5 cars valued at $10,000 each. It has contributed $50,000
to GDP. In Year 2 its contribution is $60,000. Has the firm produced more cars? Why eliminating price
changes allows us to see more clearly whether or not there have been output changes.

Q5: (B) Assume a car dealer in Pakistan imported 20 cars directly from Japan at a cost of Rs.500,000 per
car in 2005. By close of year 2005, 15 cars were sold at Rs.600,000 per car. The remaining 5 cars were
sold in 2006 for Rs.550,000 each. How are the GNP and its major components affected in 2005 and in
2006 through this transaction?

Answer 1

a) The firm did not change the number of products it produced, the prices for products changed, which could have happened as a result of a general increase in the level of income of the population. This may be evidenced by an increase in GDP.

b) The situation described in this case may arise as a result of a decrease in GNP, which leads to a decrease in the income level of the population, and, as a consequence, in the purchasing power of the population.