A farmer grows wheat, which he sells it to a miller for $100.00. The miller turns the wheat into flour, which he sells to a baker for $150.00. The baker turns the wheat into bread, which he sells to consumers for $180.00. Consumers eat the bread.

a.) What is GDP in this economy? Explain.

b.) Value added is defined as the value of a producerĆ¢??s output minus the value of the intermediate goods that the producer buys to make the output. Assuming there are no intermediate goods beyond those described above, calculate the value added of each of the three producers?

C ). What is total value added of the three producers in this economy? How does it compare to the economyĆ¢??s GDP? Does this example suggest another way of calculating GDP?

Solution Preview

a. The GDP is the amount that the consumer pays for the good. More formally it is defined to be the market value of all final goods and services produced in an economy in a given time period. The consumer pays $180 for the final good, and hence the ...

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