In a simple economy with only businesses and households, suppose that the sum total of all the goods and services produced during the relevant period pairs of shoes, candy bars, digital devices, etc. all summed together is 430 trillion units. The total dollar value of this flow of output is $42 trillion. The total amount of factors of production labor, land, capital, entrepreneurship, all summed together is 0.8 billion units. What is the flow of income that is, the sum of wages, rents, interest, and profits?
Using the income approach to GDP, we can calculate the flow of income as:
GDP = wages + rents + interest + profits
We don't have information about each component separately, but we know that the flow of income must equal the total dollar value of output:
GDP = $42 trillion
We also know that GDP is the product of the quantity of factors of production (Q) and the average productivity of each unit of factor (P):
GDP = Q x P
In this case, Q = 0.8 billion units and GDP = $42 trillion, so:
P = GDP / Q = ($42 trillion) / (0.8 billion units) = $52,500 per unit
Now we can use P and the quantities of each type of good to calculate the flow of income:
- If the economy produces 100 million pairs of shoes at a price of $50 per pair, the shoe industry generates 100 million x $50 = $5 billion of revenue. This revenue is used to pay wages to shoe factory workers, rents for shoe factory facilities, interest on loans used to purchase shoe-making machinery, and profits for shoe factory owners.
- Similarly, for other types of goods, we can calculate the revenue and the distribution of income among factors of production.
- Adding up all the revenue and income across all industries, we get the flow of income that equals GDP.
Without more specific information, we can't calculate the flow of income exactly, but we can see that it would be some combination of wages, rents, interest, and profits that sums up to $42 trillion, the total dollar value of output.
To calculate the flow of income, we need to find the total amount earned by factors of production in the economy.
Given that the total amount of factors of production is 0.8 billion units and the total dollar value of output is $42 trillion, we can calculate the flow of income using the formula:
Flow of Income = Total Value of Output / Total Factors of Production
Flow of Income = $42 trillion / 0.8 billion units
First, let's convert trillion units to billion units:
$42 trillion = $42,000 billion
Now, let's calculate the flow of income:
Flow of Income = $42,000 billion / 0.8 billion units
Flow of Income = $52,500 per unit
Therefore, the flow of income is $52,500 per unit of factors of production.