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.
There is another way to calculate the GDP of this economy, but the final answer will be the same as the one given in the previous answer to this question. To calculate the GDP of this economy, all we need to do is to think about the definition of GDP.
GDP is the market value of all final goods and services created in a given country in a given time period (usually a year). The most important word in this definition is “final.” Only final goods are counted in GDP. Final goods are those goods that are sold to a customer who will not resell them or make something out of them to be sold.
If we look at the scenario that you have given in this question, we see that only the bread is a final good. When the farmer sells the wheat to the miller, it is not a final good because the miller resells it as flour. When the miller sells the flour to the baker, it is not a final good because the baker makes it into bread and resells it. However, when the baker sells the bread, it is a final good because the customer does not resell it.
So, we can see that the GDP for this economy is $180 because that is the value of the bread, which is the only final good in this scenario.
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.