What is GDP for the economy described below?
A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which he sells to a baker for $150. The baker turns the wheat into bread, which he sells to consumers for $180. Consumers eat the bread.
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The gross domestic product is the sum of the value of all goods a services produced by an economy. There are many methods of calculating the gross domestic product. One of them is the value- added approach. This involves calculating the addition in value for each stage that a product passes through as it moves from the initial raw materials to the final product.
In the example given, the farmer grows wheat that is sold to the miller for $100. The value addition in this stage is 100 - 0 = $100. The miller buys the whet from the farmer for $100 and sells flour to the baker for $150. The value addition at this stage is 150 - 100 = $50. The baker buys flour from the miller for $150 and sells the bread manufactured for $180. The value addition at this stage is $180 - $150 = $30.
The GDP derived by adding the value addition at each stage is 100 + 50 + 30 = $180.
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