There is an orange farm and an orange juice company in a country called Orangeland. Orangelanders live only on orange juice. In 2016, the orange farm produced 10 oranges, and sold them to the orange juice company at $1 each. The orange juice company produced 3 bottles of orange juice, and sold them all at a unit price of $10 plus 10% indirect tax collected by government (so the price paid was actually $11). The orange farm paid total wages of $6. The orange juice company paid total wages of $10. The orange juice company also had to pay $4 to replace the orange juice extractor that was not working properly due to its use during 2015 (depreciation). Both companies retained 50% of their profits and paid the rest of it as dividends to the households. After receiving their wage income and their dividends, the households paid a 10% direct tax on their total income to the government. The government bought one orange juice bottle. (Notice that the firms are not paying any direct taxes on their retained profits.)
- Carefully read theOrange Farm
- Complete the directives below related to the scenario.
- Compute the GDP of Orangeland using the final goods approach.
- What is the national Income?
- What is the total income of the government?
- Determine the disposable income (income available for consumption) of the households.
- In 2016, the price of all goods (oranges and orange juice bottles) went up by 10%. Answer the questions below in a short paragraph for each question.
- Would you say that the economy experienced a real economic expansion between 2015 and 2016? Explain.
- What was the nominal GDP in 2016?
- What was the inflation rate?
- What was the real GDP in 2016 measured in 2015 prices?
- Suppose that in the year 2016 an orange blight occurs that killed 30% of the orange trees in Orangeland. The blight causes the country’s economy to take a downturn. Oranges are in short supply which results in inflation. Answer the following questions in a short paragraph for each question.
- Explain the relationship between the recession and inflation?
- What type of inflation resulted from this situation?
- Explain the impact of the orange blight on the unemployment rate?
- How would you go about measuring the unemployment rate?
- How would you measure the inflation resulting from economic change?
- What would be the impact of the unemployment and inflation on the economy?
- The scientists of Orangeland began feverishly working to find a cure for the orange tree blight. They developed a new type of tree. These trees can produce 50% more orange than the old trees. By 2020, the orange production was up by 50% over the 2016 production levels. It looked as if the economy was really booming.
- Explain the possible impact on unemployment and the economy of this increase in production of oranges.
- What would happen if there were not enough qualified workers to handle the increased production?
Correct and accurate calculations
Correct and accurate explanation of terms and their application: