Suppose a closed economy Chili and chili sauce are the only

Suppose a closed economy. Chili and chili sauce are the only things produced in the economy. The government collects $2,000 of tax from consumers, $5,000 from the chili farm and $5,000 from the chili sauce factory, and the government spends $12,000 to hire consumers to operate the government. The chili farm produces chilies that are worth $50,000. $20,000 of chilies are bought by consumers, and the rest $30,000 of chilies are bought by the chili sauce factory. The chili sauce factory produces chili sauce that is worth $50,000; $45,000 worth of it is bought by the consumers, and $5,000 worth of it is kept in the warehouse. Suppose the chili farm pays $15,000 to its workers, and the chili sauce factory pays $10,000 to its workers.

How much is GDP, calculated with the expenditure approach?

D) $77,000

A) $70,000

B) $65,000

C) $82,000

Solution

Option (C).

Consumption expenditure, C ($) = Chili purchased by consumers + Chili sauce purchased by consumers

= 20,000 + 45,000 = 65,000

Investment, I ($) = Increase in inventory in Chili sauce firm = $5,000

Government spending, G ($) = 12,000

GDP using expenditure approach ($) = C + I + G = 65,000 + 5,000 + 12,000 = 82,000