There are three firms in an economy: A, B, and C. Firm A buys $370 worth of goods from firm B and $320 worth of goods from firm C, and produces 360 units of output, which it sells at $9 per unit. Firm B buys $170 worth of goods from firm A and $220 worth of goods from firm C, and produces 320 units of output, which it sells at $7 per unit. Firm C buys $75 worth of goods from firm A and $25 worth of goods from firm B. It produces output worth $950. All other products are sold to consumers.
What is the GDP?
To answer this question correctly, we need to remember that GDP only counts final goods. Goods that are sold from one firm to another do not count as they are not final goods. Final goods are goods that are sold to consumers who then do not resell them or use them to make any other goods that will be sold. So, for example, if a company sells flour to a bakery, that sale price is not part of GDP. However, if the same company sells flour to a consumer who uses it at home, it is counted as part of GDP.
With that in mind, what we have to do is take each company’s output and subtract from that the amount that it has sold to another company. What is left over will be the amount that company sold to consumers. We add up the three companies’ outputs of final goods and that sum will be the economy’s GDP.
In this economy:
Company A produced $3240 (360 x $9 = $3240) of goods but sold $245 of that to other companies ($75 to C and $170 to B). $3240 - $245 = $2995. So Company A contributes $2995 to the economy’s GDP.
Company B produced $2240 (320 x $7 = $2240) of goods but sold $395 of that to other companies ($25 to C and $370 to A). $2240 - $395 = $1845. So Company B contributes $1845 to the economy’s GDP.
Company C produced $950 of goods but sold $540 of that to other companies ($320 to A and $220 to B). $950 - $540 = $410. So Company B contributes $410 to the economy’s GDP.
Now we add all of these contributions up. $2995 + $1845 + $410 = $5250.
The GDP of this economy is $5250.