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What is GDP for the economy described below? A farmer grows wheat, which he sells to a...

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shelleybell8 | Student, Undergraduate | (Level 2) Honors

Posted August 26, 2013 at 5:33 PM via web

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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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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted August 26, 2013 at 5:56 PM (Answer #1)

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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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