Farmer produces 20 units of wheat using labor; Miller produces 15 units of flour using 20...

Farmer produces 20 units of wheat using labor; Miller produces 15 units of flour using 20 wheat and labor; Miller sells 5 units flour directly to consumers and sells the rest 10 units to Baker; Baker produces 10 units of bread using 10 unit of flour and labor. What is GDP based on the price information below?

Pbread = 4; Pflour = 2; Pwheat = 1.

Please calculate based on the value-added approach. (10 points)

Please calculate based on the expenditure approach. (10 points)

Solutions

Expert Solution

Value added approach include value of final good only and it does not consider value of intermediate good in calculating value of GDP.

Final goods are those goods which are use for final consumption.

Intermediate goods are those goods which are used for further production.

All the 20 units of wheat is used as intermediate good to produce flour. So its value will not be included.

Total amount of flour produced= 15 units. Out of this, 5 units is for consumer as final good so its value will be included and 10 units of flour value will not be included because it is an intermediate good for bread.

Value of flour to consumer= 5 x 2= 10

All the bread production is final good.

Value of bread= 10 x 4= 40

GDP(value added approach)= 10+40= 50

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Expenditure approach include all the expenditure in the economy.

GDP= Expenditure by miler to buy wheat+Expenditure by consumer to buy flour+Expenditure by baker to buy flour

GDP= 20 x 1 + 5 x 2 + 10 x 2= 20+10+20= 50

Rahul Sunny answered 1 year ago

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