Question

In: Economics

A farmer grows a bushel of wheat and sells it to a miller for $1.00. The...

A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and sells the bread to an engineer for $6.00. The engineer eats the bread. What is the value added by each person? What is GDP?

Expert Solution

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

Rahul Sunny answered 2 months ago

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