The following data relate to a closed economy of a country where all production takes place in two firms. Use the information in the table to answer the que...
Question 1 Report
The following data relate to a closed economy of a country where all production takes place in two firms. Use the information in the table to answer the questions that follow:
| Items | Firm A (in 000 Dollars) | Firm B (in 000 Dollars) |
| Sales | 200 | 400 |
| Raw material | 100 | 60 |
| Labour costs | 80 | 160 |
| Depression | 16 | 40 |
| Profits | 4 | 140 |
(a)(i) Which of the items listed above is an intermediate input?
(ii) What happens to intermediate inputs in the calculation of the national income?
(iii) Calculate the Gross Domestic Product (GDP) of the country.
(b)(i) Calculate the total amount of depreciation of the country
(ii) Calculate the Net Domestic Product of the country.
Answer Details
(a)(i) The raw material is the intermediate input. It is a good produced by one firm and used up by another in further production, rather than being sold to a final user.
(a)(ii) Intermediate inputs are excluded (deducted) when national income is computed, so as to avoid double counting. Their value is already contained in the sales value of the finished goods.
(a)(iii) Gross Domestic Product by the value-added method: \( \text{Value added} = \text{Sales} - \text{Raw materials} \).
\[ \text{Firm A} = 200 - 100 = 100 \qquad \text{Firm B} = 400 - 60 = 340 \]
\[ GDP = 100 + 340 = \$440{,}000 \;(\$440\text{ thousand}) \]
(b)(i) Total depreciation of the country:
\[ 16 + 40 = \$56{,}000 \;(\$56\text{ thousand}) \]
(b)(ii) Net Domestic Product \( = GDP - \text{depreciation} \):
\[ NDP = 440 - 56 = \$384{,}000 \;(\$384\text{ thousand}) \]
As a check, GDP also equals the sum of incomes (labour costs + depreciation + profits): \( (80+16+4) + (160+40+140) = 100 + 340 = 440 \), confirming the value-added result.
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