Suppose Small Country has 4 households and 3 businesses. Each of the 4 households purchased $20,000 in food and gasoline consumption and $3,000 in movie tickets this year. Two households purchased a new $10,000 car produced in Small Country and one household purchased the used 2-year old car being replaced by one of those households for $4,000. One household purchased a newly constructed house for $100,000.
Each of the 3 businesses spent $15,000 in new computers, while their existing computers depreciated by $3,000. They each spent $5,000 on intermediate inputs used to produce their ?nal product from other businesses in Small Country. Each business added $1,000 of inventory to their current stock at the end of the year.
The government of small country spent $10,000 on paper and $12,000 on new computers. Existing computers depreciated by $4,000. Small Country exported $12,000 worth of socks and imported all of its gasoline ($15,000
worth).
A. Use the expenditure method to compute Small Country's gross domestic product (GDP = C + I + G + NX).
B. Suppose we used the income method to compute Small Country's GDP. Why do we have to add depreciation to the national income in order to arrive at the GDP?