Suppose that Jiffyland produces nothing but peanut butter. In 2018 the following activities were observed: Peanut...

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.

Solutions

Expert Solution

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

Rahul Sunny answered 1 year ago

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