Reference no: EM133184731

Orange Farm

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.)

1. Carefully read the Orange Farm scenario.

2. Complete the directives below related to the scenario.

1. Compute the GDP of Orangeland using the final goods approach.

2. What is the national Income?

3. What is the total income of the government?

4. Determine the disposable income (income available for consumption) of the households.

3. 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.

1. Would you say that the economy experienced a real economic expansion between 2015 and 2016? Explain.

2. What was the nominal GDP in 2016?

3. What was the inflation rate?

4. What was the real GDP in 2016 measured in 2015 prices?

4. 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.

1. Explain the relationship between the recession and inflation?

2. What type of inflation resulted from this situation?

3. Explain the impact of the orange blight on the unemployment rate?

4. How would you go about measuring the unemployment rate?

5. How would you measure the inflation resulting from economic change?

6. What would be the impact of the unemployment and inflation on the economy?

5. 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.

1. Explain the possible impact on unemployment and the economy of this increase in production of oranges.

2. What would happen if there were not enough qualified workers to handle the increased production?