In: Economics
Suppose that Jiffyland produces nothing but peanut butter. In 2018 the following activities were observed:
Peanut farmers sold $20 million worth of peanuts to
distributors.
Distributors sold $30 million worth of peanuts to processors.
Processors sold $50 million worth of peanut butter to
producers.
Producers sold $60 million worth of jars of peanut butter to
grocers.
Grocers sold $75 million worth of jars of peanut butter to final
consumers.
In this example, what are the two methods of calculating GDP? Show and explain.
The two methods of calculating GDP are as follows:
a) Value-added method
In this, the value added at each stage is added to calculate the GDP and the value of intermediate goods is excluded which the firm uses for production.
Peanut farmers sold $20 million worth of peanuts to
distributors.- value added = 20 million
Distributors sold $30 million worth of peanuts to processors.-value
added = 10 million
Processors sold $50 million worth of peanut butter to producers.-
value added = 20 million
Producers sold $60 million worth of jars of peanut butter to
grocers.-value added = 10 million
Grocers sold $75 million worth of jars of peanut butter to final
consumers.- value added = 15 million
Total value added = 20+10+20+10+15 = $75 million
b) Final goods approach
In this method, the GDP is calculated using the final value added at the price at which the goods were sold to the consumers.
Under this, the goods were sold to the consumers at the final price of $75 million so GDP=$75 million
Under both the approaches, the GDP is $75 million