In: Economics
It shall be noted that value added by a production unit = Value of the output - Intermediate cost
The farmer sells wheat to miller = $1
This implies,
he intermediate cost faced by the farmer = $0
Value of the output sold by the farmer to Miller = $1
Hence, value-added by Farmer = $1 - $0 = $1
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Miller turns wheat into flour and sells to a baker = $3
Value of the output sold by Miller to Baker = $3
Intermediate cost - Purchase of wheat by Miller from Farmer = $1
Hence, value-added by Miller = $3 - $1 = $2
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Baker uses flour and sells bread to engineer = $6
Intermediate cost = $3
Similarly for Baker,, the value-added by Baker = $6 - $3 = $3
Thus,
Value added by Farmer = $1
Value added by Miller = $2
Value added by Baker = $3
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Hence, GDP is the sum total of value added by each production unit = $1 +$ 2 + $3 = $6