Question

In a simple economy three goods are produced during the year, in these quantities: 10 pens, 20 shirts, and 30 radios. The price of pens is \(\$ 4\) each, the price of shirts is \(\$ 30\) each, and the price of radios is \(\$ 35\) each. What is GDP for the economy?

Short answer

The GDP for the economy is \(\$1690\).

Step-by-step solution

Compute the total value for pens

Multiply the quantity of pens by the price of each pen. i.e. \(10 * 4 = 40\). Hence, the total monetary value of all pens produced is \(\$40\).

Compute the total value for shirts

Similarly, for shirts: \(20 * 30 = 600\). Therefore, the total value of all shirts produced is \(\$600\).

Compute the total value for radios

For radios, the computation becomes: \(30 * 35 = 1050\). Thus, the total value of all radios produced is \(\$1050\).

Sum up total values of all goods

The GDP is the sum of the total values of all goods. That would be \(40 + 600 + 1050 = 1690\). Therefore, the GDP of this simple economy is \(\$1690\).

Key concepts

Understanding a Simple Economy

A simple economy is an economic model that focuses on the basics of production and consumption. In this context, a simple economy consists of a few goods and services without the complexities of a modern, multi-faceted economy. It helps students understand fundamental economic concepts without overwhelming details.

In our example, the simple economy includes only three types of goods: pens, shirts, and radios. Each good is produced in fixed quantities and sold at a specified price. This straightforward setup allows us to see how the economy adds value through the production of goods. By isolating these elements, students can easily calculate and conceptualize GDP, an essential economic indicator, without getting lost in complex factors.

The simplicity of this model serves as a foundation for learning more about how economies operate on a larger scale.

Calculating Goods Value

The value of goods in a simple economy is calculated by multiplying the quantity of each good by its respective price. This helps us determine the total monetary value contributed by each type of good.

For example, calculating the value of pens involves multiplying the number of pens (10) by the price per pen (\(4 ext{)\)}. Thus, the total value of pens is \(10 \times 4 = 40\text{\(}\). Similarly, for shirts, you multiply 20 shirts by the price of each shirt (\)30\(), which gives \(20 \times 30 = 600\text{\)}\). The radios are handled in the same way, with 30 radios each priced at \(35\), resulting in a value of \(30 \times 35 = 1050\text{$}\).

This step-by-step method ensures that all values are calculated accurately, providing a clear understanding of how each product contributes to the overall economic value.

Monetary Value Calculation of GDP

Calculating GDP in a simple economy involves summing the monetary value of all goods produced. This total gives us a measure of the economy’s overall production in monetary terms.

The process requires adding up the computed values of individual goods. In our case, the total value of pens is \(40\), shirts are \(600\), and radios amount to \(1050.

To find the GDP, simply add these values together: \(40 + 600 + 1050 = 1690\text{\)}\). This figure represents the Gross Domestic Product, or GDP, which indicates the total value of all goods produced in this simple economy.

By understanding this method, students can grasp the fundamental concept of GDP as a measure of economic health and output, laying the groundwork for more advanced economic study.